STEWARDSHIP REPORT 2023 /2024

CONTENTS

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5
5
7
9
11
13

15
15
17
21
23
25
27
29
30
33
37
41

Message from the CEO
SMTAM Stewardship Activities

Based on such concepts, we have established our ideal Vision, our Mission for achieving our ideals, and behavior

Evolution of ESG Investments and SMTAM Initiatives

Our Vision includes our sincere desire in regard to all potentialities in harmony with our founder s ideals and toopen up new possibilities for a better future.

Three Pillars of Stewardship Activities

It also includes our desire to warmly cultivate a truly aﬄuent society together with our various stakeholders

Stewardship Activities Promotion Frameworkthat is not just economically wealthy, but a truly aﬄuent society envisioned by all.

12 ESG Materialities

We feel it is our Mission to help everyone to reach future goals and ideals through asset management. For thispurpose, our Mission includes working closely with our clients, pursuing the best outcome through dialogue withEngagement

stakeholders, continuously addressing challenges, and pursuing asset management in harmony with current trends.

SMTAM s Collaborative Engagement
Collaboration with Various Initiatives

Realizing opportunities today to ensure sustainable prosperity for tomorrow.

Stewardship Activity Focus Topics for 2022/2023
Initiatives for Addressing Issues with Natural Capital
Initiatives for Promoting Management of Human Capital

VisionInitiatives for Cross-Shareholding Reduction

Your goals are our goals. Your success is our success.

Engagement that Contributes
to Improved Investee Corporate Value

We strive to create the new standard of asset management that acknowledges the aspirationsof all our investors and stakeholders

Engagement Example Cases - Japanand work with each of you every step of the way.

Engagement Example Cases - Global
Top-Down Engagement
Roundtable Discussion
by Engagement Specialists in Japan, US, and UK

51

Initiatives for Promoting Financial Literacy

69
85

to create a society that is not just economically wealthy, but truly aﬄuent.

policies for Values to pursue asset management that aligns with current trends together with our stakeholders.

Making the Tokyo Market More Attractive
and SMTAM Initiatives

57
62
65

stakeholders from a global perspective, continue searching for possibilities leading to a better future, and work

Corporate
Philosophy
Structure

Purposes of Stewardship Activities

49

53
57

The corporate philosophy of Sumitomo Mitsui Trust Asset Management is to share various ideas with our diverse

MissionThe ﬁrst step in achieving our Vision and Mission is to have our employees adhere to the following six Values as their individual behavior policy.

Stand in the shoes of others and engage in dialogue with empathy
At all times, we will never forget to be considerate of others.
By always putting ourselves in the shoes of others,
we will build relationships of mutual trust through ongoing dialogue based on empathy and consideration.

Have self-awareness and seek constant self-improvement

Exercise of Voting Rights

Growth is possible at any age.

ESG Integration
SMTAM s ESG Integration
Bond ESG
Global Regulation Trends and SMTAM s Response

Disclosure of Climate-related Financial
Information under TCFD
Reference

To achieve personal growth, we must consider what we can do for the society in which we live,Value

ﬁrst looking carefully at ourselves and continuing to pursue self-improvement to achieve even greater heights.

Expand curiosity and transform awareness into action
Going beyond our own specialized ﬁelds, we will keep our sense of curiosity alive,
connecting the insights and ideas we gain from this curiosity to the actions we take.

Create synergies by bringing unique personalities together
Each individual among us brings diﬀerent strengths to the table.
By respecting talents and personalities that diﬀer from our own,
and by proactively multiplying each other's strengths, we will create innovative synergies.

Pursue quality and value that goes one step ahead
We will continue pursuing quality and value one step ahead of the rest: this is our DNA.
How can we exceed client expectations?

This is a booklet issued by Sumitomo Mitsui Trust AssetManagement Co., Ltd. to report on its stewardship activities
and promote clearer communication and understanding.
The period covered is from July 1, 2022 to June 30, 2023
(including some contents from after July 2023).
Eﬀorts made throughout the Sumitomo Mitsui Trust Group
include striving to provide stakeholders with value andcollaborating on sustainability activities with scope to boost
the long-term corporate value of the Group over time basedon transparency.
For more details, visit the Sumitomo Mitsui Trust Holdings
website (https://www.smth.jp/csr/).

1

How can we become their best partner?

With these questions in mind, every small step taken by each of us will lead to a major step forward for the company.

Look ahead to the future, continuously challenging ourselves
We will not only respond to the voices of our clients and the changing times,
but also recognize current trends and create new value that is not merely an extension of what we have provided in the past.
Moreover, we will continue to take on the never-ending challengeof creating products and services that engender both inspiration and excitement.

S M T AMA M STEWARDSHIP REPORT 2023/2024

2

Message from the CEO

SMTAM Stewardship Activities

Engagement

Exercise of Voting Rights

ESG Integration

Disclosure of Climate-related Financial Information under TCFD

Reference

A new standard of asset managementthat shares various ideas

with our diverse stakeholders

While global circumstances and social/economic

This necessitates taking action from acompound

was amended in January of 2023 to require disclosure of

to maximize return on assets entrusted to us from clients byenvironments rapidly change and it becomes more and more

perspective based on diversity as opposed to a singularhuman capital and diversity in addition to sustainability in a

improving our operations and implementing productdifficult to predict what will happen, the expectations ofperspective.

company s securities report. The International Sustainability

governance.

investors and society regarding asset management are

As an example, human capital has gained attention. It is

Standards Board (ISSB), which was established by thegetting higher, making us even more keenly aware of ourmore common for companies to have an awareness that

International Financial Reporting Standards (IFRS), officially

Our Stewardship Report for this fiscal year will introduce

heavy responsibility. The role of asset management is toemployees

are important stakeholders in a company.

announced the General Requirements for Disclosure of

the various efforts we have made over the past 12 months.

serve as a bridge between investors and investee companies,

However, some companies have put an end to remote work,

Sustainability-related Financial Information (S1) andMany pages are used to introduce our engagement activities

to encourage investee companies to improve their corporate

which became a countermeasure for COVID-19, while others

Climate-related Disclosures (S2) in June of 2023, which will

to give you a better understanding. In the featured article

value, and provide investment return to investors. We believe

use hybrid working styles. Still others have long beenrequire a response by investee companies.

entitled, Roundtable Discussion by Engagement Specialists

it is essential to fulfill our mission of maximizing return on theendeavoring to create diverse working styles. Each company

assets entrusted to us by our clients, and to continuously

needs to determine the best way to improve their corporate

As institutional investors, we need to make good decisions

engagement activities in harmony with global ESG trends.

seek possibilities for a better future to create a truly

value, and whether the answer is appropriate for thatbased on the information disclosed by companies while also

There is also a list showing the relationship among 25

each participant explains ouraffluent society. To accomplish this, we will endeavor tocompany is indicated by the stock market or human resource

acting to support company efforts and behavioral changes

collaborative initiatives in which our company is participating.

share various ideas with our diverse stakeholders from amarket. Increased costs for resources, raw materials, andthrough engagement. At such times, decisions should be

I hope that this report will help all to understand our

global perspective while pursuing a new standard of asset

logistics as a result of geopolitical risks have had a major

made according to that company s situation and not just acompany s activities, which are being carried out bymanagement.

impact on corporate activities. Although the scale of impact

predetermined response, especially when making decisions

everyone reading this booklet including our stakeholders.

on business performance differs for each company, deciding

related to human capital. In other words, it is important that

The concept that addressing ESG issues and working

whether to proactively change company behavior to be more

we be able to make an evaluation based on a combination

towards improving sustainability are important has become

flexible and creative has a more significant impact onof predetermined performance indicators for horizontal

common in society and among investors and companies as acorporate value over the medium to long term.

company comparisons, and free performance indicators

generality.

3

in Japan, US, and UK,

according to each company s situation.

At the same time, when it comes toparticulars such as placing priority on issues that need to

There is also a greater demand for information disclosure by

As a signatory institute of the Principles for Responsible

be resolved and then taking specific action to do so, we facelisted companies such as on their priorities and what actions

Investment (PRI), we will improve the viability of oura number of challenges including various restrictions, while

are being taken for ESG issues and sustainability. In Japan,

stewardship activities through advanced engagement andalso recognizing that the solution may result in other issues.

the Cabinet Office Order on Disclosure of Corporate Affairs

ability to evaluate companies while also fulfilling our mission

Representative Director and President

Yoshio Hishida

S M T AAM
M STEWARDSHIP REPORT 2023/2024

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Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Purposes of Stewardship Activities

Purposes of Stewardship Activities
Supporting Value Creation in the Investment Chain

VISION

Investors, their investee companies, and each stakeholder work together based on common values. Sustainable growthand increased corporate value along with growth in dividends and wages will ultimately beneﬁt household economies,
which in turn, leads to growth of the economy as a whole. All of this together is known as the investment chain.
At SMTAM, we actively utilize our role as an asset manager in the investment chain to support our investee

Realizing opportunities today to ensure sustainable prosperity for tomorrow.

companies create corporate value, leading to maximum returns for our clients, while at the same time helping toresolve social issues.

Stewardship
Activities Output*4

Investee company
Information disclosure

Ministries Exchanges ESG vendors
Academia Consultants NPOs

Information
disclosure

Engagement

Exerciseof voting rights

Engagement

Systems, requests,
services, etc.

Approx. 88 trillion yen

44

Licensed
securities analysts

Global network
initiatives

Domestic network
initiatives

256

19 organizations

6 organizations

SMTAM s ESG Materiality*2

Increasing corporate value
for investee companies

Number of engagement meetings
in Japan
Approx. 1,300

External evaluation

SMTAM s 6 Behavior Policies*3

Investors
Existing clients and investors

Addressing ESG issues

Improving social value

The foundation of SMTAM s Stewardship Activity*1
Engagement
specialists(Equity/Bonds)

Investment Chain Enhancement

Increasing the wealthof stakeholders

Positive actions
by investee companies

SMTAM

Balanceof assets undermanagement

OUTCOME

Potential clients and investors

Maximizing investment return

Target exercising voting rights
for Japan-listed companies
Approx. 2,500 companies

Target exercising voting rights
for listed companies
outside Japan
Approx. 2,700 companies

Number of engagement meetingsoutside Japan
Approx. 390

Reinvestment of gained results*1. As of the end of June 2023 *2. See pages 13 and 14. *3. See page 2.

5*4. The number of engagements is from July 2022 to June 2023,
and the number of target companies for exercise of voting rights is as of the end of June 2023.

S M T AAM
M STEWARDSHIP REPORT 2023/2024

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Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Evolution of ESG Investments and SMTAM Initiatives

2010

1920

SMTAM
initiatives

oﬀered investment trusts of China equity SRI

2014

Since the 1920s● Accepted Japan

Initial ethical investment● Choice of investees basedon religious and ethical motives

1960s

SRI as a social movement● Cooperation with social movements

including human rights,
labor, and the environment

for non-ﬁnancial information assessment● Launched Quality Growth, a strategy

oﬀered investment trustsof Japan equity SRI
for individual investors

Both ﬁnancial
and non-ﬁnancial assessments

1990

to ESG issues and ﬁnancial impact● Signed PRIPresented the concept of ESG
in PRI (Principles for Reasonable Investment)
for the ﬁrst time in the world2021● Listed SMT ETF Carbon Eﬃcient Index Japan Equity● Bloomberg MSCI Global Aggregate Sustainability A+

Index-Linked Setting (Bonds)● Started high-return,low-beta strategy(Japanese equity, ESG consideration type)for pension trust

2022● Established the Stewardship

Asia Asset Management magazine
Best of the Bests Country Awards <Japan> Category
Received Best ESG Engagement Initiative

Activities Advisory Committee● Accepted the revised SSC(Principles for Responsible Investment)● Accepted the revised SSC● Established the Stewardship

Development Department

2006

s response2019● Developed investment impact products

2000

2006

2017

● Started oﬀering SRI funds to DC● Merging ﬁnancial and non-ﬁnancial (ESG) assessments● Integrated an assessment of the company

for managing Japanese equity(Research ROE enhancement)

2004● Set Global Equity Impact Fund Seeds

2022● Introduced MBIS®

● Started oﬀering publicly

1990 to 2000s

s Stewardship Code (SSC)

2015

2003

1960

2020

● Started oﬀering publicly

Set Seeds in Japan equity(Commercialized in 2020)

2023● Our stewardship activities were highly evaluatedin Japan and other countries*

2019
Received the Tokyo Financial Award
ESG Investment hosted
by Tokyo Metropolitan Government(February 2019)2006 SRI

2010s

Integrating the environmental
and social impact of investments

Sponsored by Tokyo

2010

Tokyo Financial Award

ESG Investment Category
Out of 40 ﬁnancial institutions across 10 countries

Award-Winning Company● Integrating the environmental and social impact

of investments as well as investment returns

Evolution of ESG Investments and SMTAM Initiatives

2015 ESG

2019 Impact

Developed
an impact investment fundas an evolutionof SRI and ESG investments

We proactively engage in ESG investment initiatives. The Principles for Responsible Investment (PRI), which were establishedwith the support of the United Nations, encourage institutional investors to incorporate environmental, social and2020

governance (ESG) factors into their investment decision-making processes. In addition to becoming a signatory to the PRI
upon its inception in May 2006, we have developed policies in accordance with the six principles. As a responsible
institutional investor in favor of Japan s Stewardship Code, and as a signatory of the PRI, we aim to achieve sustainablegrowth and sustainability for investee companies and all of society by encouraging investee companies to resolve ESG issues
through their business and integrating ESG factors in investments.
Therefore, although ESG issues change over time, the response to such issues and the priority on sustainability are constant.
Moreover, it will become ever more important to carefully consider and respond from a long-term perspective whileconsidering such changes. As an asset management company, we take this change seriously, and will continuously pursue
the balance between solving social issues and gaining a return on investments through support to investee companies.
72015
Adopted the Sustainable
Development Goals (SDGs) at the UN Summit* See page 86.

S M T AMA M STEWARDSHIP REPORT 2023/2024

8

Message from the CEO

SMTAM Stewardship Activities

Engagement

Exercise of Voting Rights

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Three Pillars of Stewardship Activities

Striving to maximize investment returns
as a responsible institutional investor.
As a responsible institutional investor, we pursue our three key pillars of stewardship activities that are built aroundengagement, the exercise of voting rights, and incorporating ESG factors into investment decision-making processes.

Maximize investment return

Our aim is to use stewardship activities as a means of helping investee companies improve their corporate value,
thereby helping us to maximize medium- to long-term investment return on the assets of our clients. Underlying all of

Improving the corporate value of investees

this is our commitment to uphold our fiduciary duties. Because we believe that appropriate management of conflictsof interest related to stewardship activities helps us better to fulfill our fiduciary duties. We are constantly working tomanage our conflict of interest management capabilities.

Help improve corporate value

3
Engagement

1

At SMTAM, we view engagement activities as opportunities to seek best practices from companies, and we communicate ourviews so as to contribute to the enhancement of corporate value over the medium to long term. Gaining a proper understandingof a company s state of management and business situation is crucial to engagement. The ESG experts in our Stewardship
Development Department work together with industrial corporate analysis professionals in the Research Investment Department
to conduct in-depth engagement from both an ESG and business perspective, utilizing our proprietary MBIS®* non-financial

Incorporating ESG factors
into investment
decision-making processes

2
Exercise of voting rights
The exercise of voting rights
provides opportunities to callfor a minimum standard ofgovernance. We exercise
voting rights appropriately andin accordance with a highly
transparent decision-making
process.

By incorporating ESG factors
into investment decision-making
processes, our aim is tomaximize medium- to long-term
investment returns for client
assets.

information assessments. We use our networks in Tokyo, New York and London to have our own engagement with investee
companies. We also conduct various activities and engage with stakeholders outside our investee companies through a wide
variety of initiatives.

Exercise of Voting Rights

2

At SMTAM, we view the exercise of voting rights as an opportunity to call for a minimum standard of governance and consider it
to be one method of governance-related engagement. We emphasize three key points when exercising voting rights: (1)high-quality governance that respects shareholders equity; (2) efficient utilization of shareholders capital for sustainablegrowth; and (3) appropriate action in the event an incident occurs that damages corporate value. We disclose our Principles for1
Engagement
Engagement activities provide
opportunities to seek bestpractices from companies, andwe express our views tocontribute to the enhancementof corporate value over the
medium to long term.

Exercising Voting Rights based on these criteria. We also actively pursue engagement with companies regarding the exercise of
voting rights.

Incorporating ESG Factors into Investment Decision-Making Processes

3

It is important to address ESG issues which can affect investee companies medium-to-long-term growth. ESG issues reside in
non-financial domains and do not manifest themselves in financial reporting, but they may have a considerable impact on
corporate value over time. We encourage investee companies to address ESG issues, and support them so that they canminimize impact on corporate value, and increase corporate value by creating business opportunities. In May 2006, SMTAM wasamong the founding signatories of PRI for prompting them to incorporate ESG factors into their investment decision-making
processes. We have also participated in various international initiatives that originated with the PRI and which led to expanded
ESG activities being undertaken worldwide. As a signatory to the PRI, we endeavor to pursue investment return upside potential
and curb downside risk by incorporating ESG factors into our investment decision-making process and aim to maximize mediumto long-term returns for our clients.

Platform to support 1 , 2 , and 3[Upholding our fiduciary duties] [Conflict of interest management]
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.

* See page 58.

9S M T AMA M STEWARDSHIP REPORT 2023/2024

10

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Stewardship Activities Promotion Framework

Conflict of Interest Management

Stewardship Activities Promotion Framework
Stewardship activities promotion is principally the responsibility of the Stewardship Development Department, which works in conjunction withhighly experienced analysts in the Research Investment Department. Within Japan, we execute in-house stewardship, and join the platform provided

The Sumitomo Mitsui Trust Group has established and publicly released its Policies regarding the Fiduciary Duties of theSumitomo Mitsui Trust Group. We promote initiatives aimed at providing client-oriented products and services in line with theseby the Institutional Investors Collective Engagement Forum (IICEF) to pursue joint engagement. Outside Japan, we dispatch representatives frompolicies. As we step up our stewardship activities, we believe that proper management of conflicts of interest relating to theseTokyo to meet with overseas companies, as well as rely on the in-house engagement efforts of our New York and London offices; additionally, we

activities will contribute to deeply embedding fiduciary duties into the way we do business; hence, we have put in place acarry out engagement through global initiatives and undertake collaborative activities. All stewardship activities are reviewed and reported to the
Sustainability Committee and to the Stewardship Activities Advisory Committee (hereinafter, the Advisory Committee), the majority of whose

conflict of interest management system.

members are independent, outside experts. At these committee meetings, revisions to the Principles for Exercising Voting Rights are also considered.

●Conflict of Interest Management System
SUMITOMO MITSUI TRUST ASSET MANAGEMENTManagement meetings, etc.

Board of Directors

ReportExecutive Officer in chargeof Stewardship
Development Department

Sustainability Committee*1(formerly, Stewardship Committee)

Inquiry

Chairperson: Executive Officer in charge of Stewardship
Development Department(Authorized decision maker)[Members] Executive Officers and General Managers of Stewardship

Stewardship Activities Advisory Committee
Comprised of three independent,
external experts (the majority of members)
and one SMTAM representative

Recommendation

Development Department, Business Planning Department, Investment
Departments and Investment Risk Management Department. Executive Officer ofCompliance Department (General Managers of the Product Development andInquiry/
Recommendation

Fiduciary Duty Advisory Committee

Inquiry/
Recommendation

Stewardship Development Department

Each operation department

Preliminary discussion

Conflicts of Interest Committee
Conflicts of Interest Management
Enhancement Committee

Discussion/Enhancement
Supervision

Discussion/Enhancement

Group companies

Sumitomo Mitsui Trust Bank

Middle department

Board of Directors

×

Engagement

Inquiry/Recommendation

Fiduciary Duty Discussion Panel (cross-company)

Conflict of interest management/Monitoring

Considering whether it is necessary to review ESG materiality
and creating a review plan

Management meeting

Preliminary discussion

Conflicts of Interest Management
Enhancement Committee

Corporate Sales Division

Restriction on personnel transfers, information exchange, and interaction

Engagement policy and activity reporting

Exercise of voting rights

Policy approval and results reporting for the exercise of voting rights

ReportRegarding possible conflicts of interest related to stewardship activities, we will conduct strict management according to

ESG monitoring

company rules including conflict of interest management rules, investment management business rules, and other related rules

Formulating an annual planin order to put the interests of clients (beneficiaries) first. We have also disclosed an overview of the policies determined in(Materiality, engagement activities, initiative activities, and exercise of voting rights)

Monitoringthese conflict of interest management rules.

(Engagement activities, initiative activities, exercise of voting rights, ESG products, and ESG score)

Global initiative-driven activities*2
ReportCollaboration

exercise of voting rights independent of the executive authority of other departments, which eliminates any possible conflicts ofCollaborationinterest regarding the exercise of voting rights. Specifically, conflicts of interest include other departments exercising influence on
the investment department based on, for example, the importance of a business partner or the size of transactions. The Advisory

Research Investment Department

Committee consists mainly of external experts with guaranteed independence. This organization deliberates on various inquiries
made by the Executive Officer in charge of the Stewardship Development Department, and then makes a report. They establish,
amend, or abolish company guidelines on exercising voting rights, approve or disapprove proposals not stipulated in the

Global 3-pole system*4

Listed company

Host meetings, etc.

Collaborative

Institutional Investors
Collective
Engagement Program

engagement

Collaborative engagement (Japan)

Collective Engagement Forumhttps://www.smtam.jp/company/policy/coi/At the Company, the Executive Officer in charge of Stewardship Development Department has exclusive authority over the

Stewardship
Development Department

Corporate analysts, Credit analysts

participation

Management meeting

Advisory Committee

ESG materiality

ProgramBoard of Directors

Stewardship Activities

Promotion Department also participate in discussions regarding ESG products)

Institutional investor

Sumitomo Mitsui Trust Holdings

Discussion/Enhancement

Sustainability Committee meetings are held every month, and Advisory Committee meetings are held every quarter. Reports on stewardship activities
are also made to the Board of Directors, at management meetings, and to the FD Advisory Committee once a year.

guidelines, determine the appropriateness of interpreting the guidelines in individual proposals, and verify or improve theprocess for determining whether to implement a proposal that could cause a conflict of interest. The Executive Officer in charge

US Subsidiary
SuMi Trust AssetManagement Americas*3of the Stewardship Development Department makes decisions on various matters while respecting reports from the Advisory
UK Subsidiary
SuMi Trust International*3

and improvement measures are taken while respecting the report to the extent possible.
Regarding all proposals to the parent company, Sumitomo Mitsui Trust Holdings, Inc., and regarding proposals for candidates as
officers of investee companies who have a close relationship with the Company or the parent company (active officers, persons*1. The former Stewardship Committee was reorganized on October 1, 2023.

who were in important positions, etc.), in order to manage conflicts of interest, we consider the advice of voting advisory*2. See pages 17 and 20 for a list of activities.
*3. A subsidiary wholly owned by SMTAM*4. The 23 employees who engage in stewardship promotion (including those in London and New York) mainly include analysts,
portfolio managers, and overseas expatriates. They have an average of 20 years of investment experience.

Committee, and if the committee submits a report on improvements to the exercise of voting rights, prompt necessary corrective

companies based on the Principles for Exercising Voting Rights, and properly deal with conflicts of interest after confirmation is(As of October 1, 2023)

made by the Advisory Committee before exercising voting rights. At general meetings held from July 2022 to June 2023,
determinations were made using the above process for 12 companies.

11

S M T AAM
M STEWARDSHIP REPORT 2023/2024

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Message from the CEO

SMTAM Stewardship Activities

Engagement

Exercise of Voting Rights

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

12 ESG Materialities

12 ESG Materialities
We have identiﬁed 12 important ESG issues as ESG materialities. These are sorted from the perspectives of risks
and opportunities in order to improve investee value and promote sustainable growth, and are then used for ESG
evaluation of investees, engagement activities, and for determining the exercise of voting rights.
ESG materiality
1 Climate Change

Ｅ ｎｖｉｒｏｎｍｅｎｔ

2 Natural Capital

Risk / Opportunity
Risk

Risk

Main engagement theme and target
Greenhouse gas emissions reduction

Consistency with Paris Agreement (1.5ºC scenario)

Improving the sustainability of corporate activities
with high dependency on natural capital and reducing usage amounts

Risk

Opportunity

5 Human Rights& Community

Risk

as possible. For 2030 interim targets, we will continue having engagements with management foremissions, which is causing natural disasters to intensify. We conducted engagement to request therequesting the formulation of viable and specific action plans for the transition path according toformulation and disclosure of a detailed action plan for setting interim targets for 2030.

the industry while also raising reduction targets in line with the Paris Agreement.

For companies that have a high dependency on natural capital and resources, discussions were held

Maintaining and improving natural capital and biodiversity are important obligations for people living

about the shift to corporate activities that take the protection of natural resources and biodiversity into

today. In addition to efforts for achieving zero damage to natural capital through the conservation ofwater resources and forests, as well as responsible land use, we will encourage corporate actions
that aim to restore and thus maintain and improve natural capital and biodiversity.

Sustainable procurement of raw materials (palm oil, natural rubber, and timber)

We repeatedly engaged with companies connected with initiatives and issues for preventing marine

To realize a circular economy, it is essential to strengthen cooperation among industries andpollution and realizing a circular economy. We engaged in dialogue for requesting initiatives foramong companies at each stage of the value chain. We will encourage corporate actions for

Tackling issues of illegal deforestation and agricultural land development, and ocean plastic

Expanding sales of environmentally-friendly products and services

improving the rate of certification acquisition/procurement related to procurement of raw materials.

establishing a circular economy including the development of products and services that takeresource recycling into consideration along with education/awareness activities for consumers.

Continuous engagements were conducted on clarification of definitions for target products and services

It is essential to find balance between resolving environmental issues and achieving economic

Promotion of technology developments that help reduce environmental load

as well as on target setting in order to encourage the promotion of company technological development

returns in order to achieve social and corporate sustainability. We will encourage companies toand sale of products and services that will help reduce environmental load.

take the initiative to realize this and to improve corporate value.

Enhancement of human rights due diligence, and visualization of responses/handling of human rights
issues by setting up a grievance mechanism

We conducted engagement for requesting management of risks related to human rights violations

In addition to risk management by establishing a human rights policy and establishing andincluding child labor and forced labor among immigrants, and for establishing a system of due diligence

operating a system for human rights due diligence, we will also encourage proactive information

for preventing potential human rights violations. We also advanced engagements on implementing

disclosure on related initiatives for improving corporate value. We will encourage improvement ofstructures such as board of director regulations and a grievance mechanism to improve traceability ofcommunity sustainability by reducing the supply chain load and just transition.

Transitioning to a resource circulation model

Environmental load and work environment, management of chemicals, and ensuring traceability of conflict minerals

Ｓ ｏｃｉａｌRisk

For companies with high emissions, we will encourage the taking of specific effective action as soonan action plan that aligns with the Paris Agreement in regards to the reduction of greenhouse gas

themes and identifying issues, and then encouraged companies to carry these out.

Just transition

6 Human Capital

After positioning climate change as a top priority issue, we promoted goal setting and the formulation of

consideration. Since there are broad concepts involved, we conducted engagement for selecting proper

Reducing waste

4 Environmental
opportunities

Future activity policy

Conservation of water resources and forests, and recovery of biodiversity
Achieving 30 by 30* by 2030

3 Pollution& WasteMain activities / Initiative contents from the past year

Clarification of human resource strategies (Human resource development, recruitment, placement, and evaluation)

Improving employee engagement

Promotion of DE&I management, establishment of diversified working styles, and a more flexible organization culture

raw materials and to better understand supply chain risks.
We conducted engagement on initiatives for reducing the workforce and improving human productivity throughWhile utilizing human capital by promoting DE&I management, we will continue conducting

work style reforms associated with the spread of remote work and the promotion of digital transformation (DX).

engagements for requesting initiatives to improve corporate value. These initiatives include

We also conducted engagement for correcting engagement indexes and labor habits that appear negative fromenhancing employee engagement, disseminating corporate philosophy and business strategies,

an international perspective, and on initiatives for eliminating gender gaps while considering how to ensureand fostering each employee s ability to create value.

human resources and improving company ability in the midst of declining birthrates and aging populations.

7 Safety& Responsibility

Risk

Promotion of well-being initiatives

Improving access to medicine, countermeasures for infectious disease,and responding to antimicrobial resistance issues

We discussed AMR issues as potential risks in addition to maintaining/managing the health and safety of

From the perspective of well-being, we will encourage initiatives for maintaining/managing theemployees while securing and improving access to medicine globally.

health and safety of employees, and for improving the ability of each employee to create value
for increasing corporate value. We will also continue having engagements for requesting
initiatives to improve external evaluations through active information disclosure on improving

Product safety management and zero occupational accidents

8 Social
Opportunities

Opportunity

Expansion and promotion of products and services that address social issues
Building sustainable social infrastructure and business model

access to medicine globally.
We had engagements on relationships and initiatives for enhancing local infrastructure sustainability,

We will promote initiatives for business that resolves social issues by creating employment

reforming business models, and addressing social issues through company products and services, which

opportunities and job support. We will also encourage companies to shift to a business model

also contribute to increasing corporate value, as well as on initiatives aimed at improving disclosurethat is sustainable within communities with aging populations and declining birthrates.

practices and establishing clear goals.

9 Behavior

Risk

Promotion of non-financial (ESG) information disclosure

Ｇ ｏｖｅｒｎａｎｃｅImproving awareness of capital efficiency and capital cost

Promotion of proper capital policies and business portfolio reforms

While encouraging disclosure, materiality identification, and the setting of KPIs, we reviewed the effective

A backcast perspective based on a long-term vision is important for a company s medium-term

use of funds and unprofitable businesses, and discussed measures for improving capital efficiency suchmanagement plan. We will continue to have discussion with management personnel on setting

as by reviewing business portfolios based on capital costs.

goals through backcasting as external uncertainties increase, and on their achievement, alongwith the resolution of various issues.

Purpose management (vision, mission, value) and alignment with the management strategy

10 Structure

11 Stability& Justice

Risk

Risk

Board of director structure and skill set

We held repeated discussions with companies about forming the optimal structure for the board of

We will encourage the improvement of corporate value through the establishment of a diverse

Promotion of board diversity

directors for achieving ideals such as promoting diversity and improving the skill set of the board ofboard of directors necessary for realizing its purpose, corporate philosophy, and long-term vision.

Better governance of company misconduct and prevention of recurrence

We encouraged companies facing misconduct to investigate the cause and establish measures for

We will continue to engage with companies that have experienced misconduct, encouraging

preventing recurrence while organizing a monitoring system. In cases where the cause seemed to beactions to prevent its recurrence and to improve management discipline, as well as requesting

related to governance, we held discussions on the need to review and enhance the governance system.

the establishment of risk management processes to prevent such incidents beforehand.

Enhancement of risk management

Improvement of management rules (Cross-shareholding, takeover defense measures)

Reviewing and enhancing group governance systems (Including parent-subsidiary listing issues)

12 GovernanceImprovement

Opportunity

Improving the effectiveness of the board of directors(Fulfillment of roles by independent external directors, remunerations system for directors, and planning for successors)

directors.

We continued engagements to emphasize the need to improve management discipline by reducing
cross-held shares and abolishing defense measures for takeovers where there is advance warning.
Dialogues were repeatedly held on initiatives for enhancing the effectiveness of the board of directors,

We will promote the improvements to corporate value by encouraging the establishment of aincluding demonstrating the independence of external directors, designing proper incentives for director

foundation that allows each director to demonstrate their potential and to fulfill their role.

remuneration, and developing plans for the necessary skills and training of successors.

*30 by 30: G7 goal that aims to halt and reverse the loss of biodiversity by preserving at least 30% of land and ocean areas as healthy ecosystems by 2030.

13

S M T AAM
M STEWARDSHIP REPORT 2023/2024

14

Message from the CEO

SMTAM Stewardship Activities

Engagement

Exercise of Voting Rights

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

SMTAM s Collaborative Engagement

Engagement
Engagement is one of the three pillars of our stewardship activities. In addition to investee companies,

collaboration with other investors who share the same beliefs. Engagement also includes activities that expand

engagement is carried out with various stakeholders including public agencies, exchanges, industry groups,

the investor base. This Engagement section will go into detail on our engagement activities.

NGOs, and academic institutions. While engagement is something we can do on our own, it is also done in

SMTAM s Collaborative Engagement
Ｅ ｎｖｉｒｏｎｍｅｎｔ

SMTAM s Materiality
Climate Change

Ｓ ｏｃｉａｌNatural Capital

Support pledge

Governance Improvement

Market Development / Reports[1] PRI[7] 30% Club (UK) [7] Thirty Percent Coalition (US) [22] 30% Club (Japan)[2] Climate Action 100+

According to purpose

Other[3] United Nations GC

Awareness, information sharing,
and activity promotion

Collaborative engagement

Security
Responsibility

Human Capital

Human Rights & Community

Ｇ ｏｖｅｒｎａｎｃｅ[16] AIGCC (Asia)[1] PRI Stewardship Initiative on Nature[1] PRI Advance[9] AMR[17] ICGN[15] CII (US)[8] ATM[12] FSDA[13] NA100[14] Ceres (US) - Climate change

Water

Human rights issues[5] FAIRR - Climate change

Environmental pollution

Labour issues[23] IICEF (Japan)

Policy engagement

Information disclosure and analysis[18] The Investor Agenda[11] IPDD[1] PRI Collaborative Sovereign Engagement (Australia)[4] CDP - Climate change

Water and forests[20] TCFD Consortium (Japan)[10] TNFD Forum[6] SPOTT[21] EDSG (Japan)
Other (Asset management company organizations)[19] Net Zero Asset Managers initiative[24] JSIF (Japan)▶For more details about each initiative, see pages 17-20.

Note 1: For working groups, only PRI is listed.
Note 2: Initiatives without a region such as (Japan), (UK), (US), or (Asia), are global.
Note 3: Numbers at the beginning of initiatives indicate the initiative No. in the list (pages 17-20).

15[25] JSI (Japan)

Certain social issues such as climate change are global.

and result in mutual benefits. These were selected based onallow us to promote multi-layered engagement with

(NZAMI, [19]), chair of the 30％ Club Japan Investor Group

Collaborative engagement is an approach to such issues

such criteria.

companies, policy engagement with policy makers, and([22]), and as a director of the ESG Disclosure Study Groupacross barriers in collaboration with other investors who

Activities and information are shared among our threepromote systematic/integrated improvements to information(EDSG, [21]).

share the same beliefs. Of course, it is not limited to global

offices. Initiatives in the US are engaged in by members in thedisclosure and analysis.

Participating in such initiatives has significant merits such as

matters. There are also local and domestic activities. SMTAM

US and Tokyo offices, initiatives in Europe are done in

As for natural capital, we are expanding our activities that

helping us to understand global trends related to ESG issues

has been actively promoting collaborative engagement tocollaboration with members from the UK and Tokyo offices,

are related to information disclosure and analysis to The

and how best to respond. Bringing back such information to

support individual engagement activities, as actions that wewhile activities in Japan and Asia/Australia are mainly

Investors Policy Dialogue on Deforestation (IPDD, [11]),

Japan helps us to enhance our overall stewardship activities.

believe can have an effect greater than the sum of individual

engaged in by members from the Tokyo office. We efficiently

Finance Sector Deforestation Action (FSDA, [12]), Nature

As an example, the FSDA, which we began participating incompanies, and as a way to improve the functionality andand effectively engage with companies and carry out policy

Action 100 (NA100, [13]) in addition to TNFD Forum ([10])2022 (signatory in 2021) is an initiative related to natural

efficiency of our activities. Our participation is determined byengagement with governmental parties as we collectand SPOTT ([6]) in order to strengthen systematic/integrated

capital that is designed to prevent the destruction of forests

whether (1) it is in harmony with our ESG materiality, (2) we

information.

activities for natural capital.

in the soft commodities supply chain. Since companies

expect a synergetic effect with individual engagement, andFor example, we are participating in initiatives related to

We are also proactively involved in management ofoutside Japan are more advanced when it comes to(3) we expect to gain new know-how. There are various

climate change, which we consider to be important, such as

initiatives. For example, we have been appointed as

information disclosure on forest conservation, we utilize theinitiatives for such collaborative engagement. As the above

Climate Action 100+ (CA100+, [2]), The Asia Investor Groupmanagement committee members who oversee the activities

knowledge we learned through our participation by applying

table shows, we are participating in 25 initiatives as of Juneon Climate Change (AIGCC, [16]), Farm Animal Investmentof the IPDD, Board of Governors of the International

it to engagement with investee companies and to2023. We believe it to be important that all such activities by

Risk & Return (FAIRR, [5]), Ceres ([14]), Carbon Disclosure

Corporate Governance Network (ICGN, [17]), Advisory

information provision in Japan.

done systematically, be in harmony with our ESG materiality,

Project (CDP, [4]), and The Investor Agenda ([18]). These

Group members of the Net Zero Asset Managers initiative

S M T AMA M STEWARDSHIP REPORT 2023/2024

16

Message from the CEO

SMTAM Stewardship Activities

Engagement

Exercise of Voting Rights

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Collaboration with Various Initiatives

Collaboration with Various Initiatives (As of the end of July 2023)
Date signed

Title

UN climate change-related

1

Affiliated working group(Year principally indicates participation year)

Main accomplishments from activities in the past year (Principally from July 2022 to June 2023)[1] PRI Advance (2022)- As a collaboration manager, we conducted collaborative engagement for human rights with companies in the raw materials sector in Korea and China.

[2] PRI Collaborative Sovereign Engagement (Australia) (2023)- We attended meetings with responsible persons in the Australian government to exchange opinions.

[3] PRI Stewardship Initiative on Nature (2023)- At the PRI Webinar Series (5 in total), we joined as a panelist in the second webinar entitled Climate Change Issues and Activities based on
Global Initiatives and the fifth webinar entitled Biodiversity and TNFD / Trends with Investors.

2

December
2017

The purpose is to reduce greenhouse gas emissions, improve climate change governance, and strengthen
information disclosure related to climate with the goal of having target engagement companies comply with
Paris Agreement standards. It is operated and coordinated by five investor networks, which are PRI, AIGCC,
Ceres, IGCC, and IIGCC. Around 740* investment managers are participating to promote collaborative
engagement with about 170* global companies that have large greenhouse gas emissions.

3

United Nations GC(Global Compact)

July 2005 as
the Sumitomo
Mitsui TrustGroup

All Ten Principles of the four areas defined by the United Nations Global Compact (human rights, labour,
environment, and anti-corruption) are recognized internationally as universal values adopted and agreed to
globally. Signatory members agree with the 10 principles and are required to make continuous efforts toachieve these based on the commitment of top executives from their companies and organizations.

CDP

April
2014

They promote information disclosure by companies on natural capital such as water security and forests inaddition to climate change with the goal of resolving climate change issues and helping to preserve andrestore natural capital. They send questionnaires to companies about information disclosure regarding thesematters, and depending on the response, they give a score and provide this as reference information forengagement to participating investors.

FAIRR

October
2018

Their purpose is to raise awareness of risks and opportunities related to ESG in the global food sector. It
focuses on sustainability issues related to intensive livestock farming, including environmental pollution, labor
issues, antimicrobial resistance, and climate change issues, and participates in collaborative engagementwith the aim of minimizing system risks over the long term from a broad perspective in the food value chain
while encouraging responses to related business opportunities.

February
2020

This was established by the Zoological Society of London (ZSL). Their purpose is to give a score tocompanies related to palm oil, timber, and natural rubber based on sector-specific ESG indicators with the
purpose of monitoring the progress of responses to long-term issues. They provide these scores to asset
management companies and others, and provide support for improving ESG risk management, relationships
with stakeholders, and transparency across multiple industries.

- As a member of TAG (Technical advisory group), we exchanged opinions with members in the London office and discussed how to improveassessments of the natural rubber supply chain.

April
2017

The 30% Club UK Investor Group is a working group consisting of institutional investors in the UK engaged ina global campaign aiming to increase the percentage of women in decision-making bodies at companies
including the boards of directors. The purpose of the Thirty Percent Coalition is to increase the diversity ofboards of directors and senior management of companies in the US. The aim of both is to achieve diversity
in companies by sharing best practices and participating in joint campaigns with the goal of hiring diverse
directors not just in regard to gender but also race and ethnicity.

- The 30% Club UK Investor Group introduced case studies from business companies, created analysis reports on diversity, and shared bestpractices related to 30% Club initiatives from other regions.
- At the annual meeting of the Thirty Percent Coalition in November 2022, commissioners of the SEC (U.S. Securities and Exchange Commission) andwomen and minority directors from companies in the US were invited to a panel discussion, and reports, etc., were presented on diversity analysis
for boards of directors of companies in the US.
- We directly participated in these activities by utilizing our 3-pole system including our offices in the US and UK, and learned about advanced
diversity activities in Europe and the US.

April
2018

This was established with funding from the Bill & Melinda Gates Foundation and the UK and Dutch
governments. Its purpose is to encourage major pharmaceutical companies around the world to provide
medicines and medical services to developing countries, and to improve their medical infrastructures so thatpublic health can be improved in these countries.

- As a lead manager with major pharmaceutical companies in Japan, we promoted collaborative engagement to encourage them to establish andimplement a management strategy for improving access to medicine.
- We appeared on stage at the Access to Medicine Index Tokyo Conference held in December 2022, and presented our initiatives.

5

Speciﬁc topic-relatedThis was established under of the United Nations Environment Programme Finance Initiative (UNEP FI). The
purpose is to promote investment activities and stewardship activities based on the Principles for
Responsible Investment by investment managers for creating a sustainable society as promoted by theUnited Nations. We have been a participant since its inception. To date, this agreement has been signed byaround 5,400* investment managers, asset owners, data service companies, and others, and total assets
under management by signatory managers have reached 121 trillion USD. It is an essential initiative for
global investment managers.

cooperating with the United Nations, NGOs, and other organizations to implement activities in keeping with our signatory commitments.

Climate Action
100+

4Global initiatives

May
2006

PRI

Initiative details

As a signatory asset manager to international guidelines and principles on corporate conduct, we engage with investee companies while

6

SPOTT

7

30% Club UK
Investor Group,
Thirty Percent Coalition- As a lead manager, we continued to have collaborative engagement mainly with Asian companies in Japan, Indonesia, Korea, and Thailand. As acollaboration manager, we continued to have collaborative engagement with companies in the US.
- As a lead manager, we discussed ideal global decarbonization pathways for the steel industry, discussed disclosure and evaluation methods forcontributing parts to decarbonization through provision of technologies, products, and services from major electronics industries, and discussed
ideal disclosure on lobbying for examining engagement contents.

- We participated in a panel discussion hosted by the CDP (Singapore) at an event of the UN water conference, and discussed water security with
ASEAN government agencies and businesses.

[1] Sustainable Proteins (2021)- As a lead manager, we conducted collaborative engagement with food makers in the US based on the theme of sustainable protein.

[2] Working Conditions in Global Meat Supply Chains (2021)- As a lead manager, we conducted collaborative engagement with Brazilian meat packaging companies about their work environment.

8

Access to9

Investor Action
on AMR

November
2020

This was established by Access to Medicine, FAIRR, and the UK s Department of Health and Social Care atthe World Economic Forum Annual Meeting (Davos) held in January 2020. Its purpose is to encourage
investors to take the initiative regarding the global issue of antimicrobial resistance (AMR), and to improvesocial acknowledgment of its threat in order to protect social, economic, and long-term portfolio value.

- We participated in the NIKKEI FT Communicable Diseases Conference that was held in November 2022 as the only investment manager fromJapan, and presented our views and specific initiatives on AMR.

TNFD Forum

Jun
2021

Its purpose is to encourage companies to disclose information on natural capital according to the TCFD,
which is an information disclosure framework for climate change. There are over 1,000 stakeholder
organizations* who participate including financial institutions and government officials. They published apreliminary version (beta version) of the TNFD information disclosure framework, solicited public commentson it, held discussions on the final plan, and then published the final proposal (v1.0) in September 2023.

- We participated in the preliminary committee that was set up in September 2020, and also joined in public comments. We also participated inand gave recommendations at the TNFD meeting at the 15th Conference of the Parties to the UN Convention on Biological Diversity (COP 15) heldin Montreal, Canada in 2022.

10

11

12
13

Medicine

July
2020

IPDD

FSDA

NA100

Its purpose is to promote policy engagement on forest conservation with the governments of each country.
Since forest resources play an important role in climate change as carbon sinks, it promotes collaborative
engagement with the governments of Brazil and Indonesia, which have large areas of tropical rainforest, toencourage stricter policies on land usage.

[1] Brazil Engagement Group (2020)- As a management committee member for supervising and managing group activities, we are involved in the operation and management of initiatives.
- In April of 2023, we had dialogue with the new President Lula administration of Brazil, and exchanged opinions and gave recommendations onforest conservation in the Amazon according to the local situation.

[2] Indonesia Engagement Group (2021)- In October 2022, we held a meeting with the government and people related to financial markets in Indonesia. A Memorandum of Understanding
was concluded with the Jakarta Stock Exchange and IPDD for providing advice on sustainability.

[3] Consumer Countries Group (2022)- For the European Commission, we conducted policy engagement with countries and regions (including the US, Europe, and China) that import andconsume agricultural products and processed products, like palm oil and soy, which are at risk of contributing to deforestation.

November
2021

At COP26 held in 2021, we agreed and signed the Financial Sector Commitment Letter on Eliminating
Commodity Driven Deforestation. Later, this was established mainly by signatory institutions with the
purpose of stopping the destruction of forests in the soft commodities supply chain. Collaborative
engagement has been promoted throughout the world with more than 70 companies that are deeply
involved in deforestation.

- In September 2022, we began collaborative engagement with companies that have a soft commodities supply chain. We encouraged companies inJapan, Korea, Malaysia, and Indonesia as well as financial institutions that provide finances to such businesses, to disclose and implement effective
measures for avoiding deforestation risks by 2025.

September
2023

Under the notion that more than half of the world s GDP depends on natural capital, and that depletion ofnatural capital will negatively impact the global economy, its purpose is to halt and reverse the loss ofnature and biodiversity by 2030 (nature positive). It is planning to promote collaborative engagement forencouraging the top 100 companies in the world with high dependency and impact on natural capital to
improve their information disclosure and governance, and to change their behavior through these.

- We participated in events at the COP15 held in Montreal, Canada, and were present at the NA100 launch announcement. We were also on stage
for discussions about the purpose of its activities.

* As of March 2021

17

S M T AMA M STEWARDSHIP REPORT 2023/2024

18

Message from the CEO

SMTAM Stewardship Activities

Engagement

Exercise of Voting Rights

ESG Integration

Disclosure of Climate-related Financial Information under TCFD

Reference

Collaboration with Various Initiatives

Title

Investor group-related

Global initiatives

14

15
16
17
18

Speciﬁc topic-related
Investor group-relatedDomestic initiatives

Climatechange-related

19

20

21

22

23

Date signed

April
2017

Ceres

Initiative details

Its purpose is to help resolve environmental issues related to climate change and water resources as well as
issues with sustainability including related human rights issues through wide global network collaboration
with investors, companies, and non-profit organizations. It aspires to achieve sustainable economic growthand capital market development, and therefore promotes collaborative engagement, uses science to analyze
issues, proposes solutions, and promotes policy advocacy.

Affiliated working group(Year principally indicates participation year)

Main accomplishments from activities in the past year (Principally from July 2022 to June 2023)[1] Investor Water Hub (2019)- With the Valuing Water Finance Initiative, we conducted collaborative engagement with US fast food companies as a lead manager, and as acollaboration manager for US beverage companies.

[2] Biodiversity Working Group (2020)- We conducted collaborative engagement on deforestation in Brazil with grain trading companies in the US.

[3] Food Emission 50 (2021)- We conducted collaborative engagement on climate change risks in agriculture supply chains with meatpacking companies and discountstores in the US.

[4] Paris Aligned Investment (2021)- We participated in panel discussions of the Paris Aligned Investment Working Group. We explained the status of our efforts related to natural
capital and climate change.

CII

June
2018

Its purpose is to achieve effective corporate governance, strong shareholder rights, and sensible financial
regulations that foster fair, vibrant capital markets. Most participants are asset owners and asset
management companies in the US. It promotes education for investors on corporate governance, policy
advocacy, and stakeholder engagement.

AIGCC

December2017

Its purpose is to encourage companies in Asia to reduce greenhouse gas emissions, improve climatechange governance, and strengthen information disclosure on the climate. It also plays a supervisory role in
Climate Action 100+ for the Asia region. Investment managers in Asia conduct collaborative engagement topromote the Asian Utilities Engagement Program (AUEP) targeting major public utility organizations in
Asia including Japan.

[1] Energy Transition Working Group (2023)[2] Forest and Land Use Working Group (2023)- As a lead manager, we continue to have collaborative engagement with major power company groups in Japan.
- We began participating in working groups [1] and [2] for the first time and proactively joined in discussions on solutions to cross-sectional energy
issues in Asia and issues related to forest and land usage.

September
2017

Its purpose is to establish global standards for corporate governance.
It provides recommendations and practices collaborative engagement with policy makers including relevant
authorities and related organizations in each country and region.

Natural Capital Committee (2021)
Policy Oversight Committee (2021)- We are appointed to the Board of Governors.
- At the Japan/Korea conferences held in October 2022, we participated in panel discussions on corporate governance reforms for these countries,
and gave our opinions and lobbied with related organizations such as the Financial Services Agency, Ministry of Economy, Trade and Industry, and
KEIDANREN (Japan Business Federation).
- As a board member of the ICGN, we participate in the Natural Capital Committee and Policy Oversight Committee.

June
2019

Its purpose is to speak out for investors who request countries participating in conferences on climate change
and international conferences such as the G7 and G20 to strengthen measures on climate change. In addition,in 2022, they announced a new evaluation framework for performing self-evaluations for stewardship activities
related to climate change issues by investment companies referred to as ICAP, and they recommend thatinvestment companies disclose information using ICAP.

Global Investor Statement to Governments on The Investor
Agenda Climate Crisis (Signed and agreed to the 2023 Investor
Statement)- In the statement made in July 2023, in addition to climate change, we repeated appeals to strengthen measures for protecting forest
resources that are deeply connected to climate change.
- We conducted a self-evaluation of our stewardship activities related to climate change according to ICAP, and disclosed it in our
Stewardship Report.

July
2021

This is an international group of asset management companies with the goal of achieving net zero greenhousegas emissions from assets under management by 2050 in harmony with global initiatives to limit global
warming to 1.5ºC.

- We have been appointed as an Advisory Group member.
- We participated in an in-person meeting held with the NZAOA (Net-Zero Asset Owner Alliance) in London as an NZAMI Advisory Committee
member. We conducted an exchange of opinions between asset owners and asset managers about initiatives for climate change issues.
- We took the stage as a representative of the Asia region Advisory Group at the NZAM Bi-Annual Signatories Meeting. (Australia, held online)

May
2019

Their purpose is to create opportunities for discussing initiatives on promoting effective information disclosure
by companies and linking the disclosed information to proper investment/loan decisions by financial institutes,
etc., through the integrated efforts of companies and financial institutes who agree with TCFD
recommendations. It expects to have active discussions on effective information disclosure while also
proactively participating in international discussions and information sharing so that such initiatives are
accepted by the global market.

- We participated in the TCFD roundtable, which included investment managers and issuing bodies, and gave advice on disclosure that we, as aninvestment manager, expect from the participating business companies (participating listed companies), along with exchanging opinions.

June
2020

Their goal is to create a system for aligning the sustainable development of society with the enhancement andgrowth of corporate value. Listed companies, institutional investors, and public agencies collaborate forachieving an effective and efficient ESG information disclosure framework, collect practical examples(verification), and promote mutual understanding among stakeholders for better decision-making. Suchachievements are shared in Japan and throughout the world, and in particular, recommendations are sharedwith the ISSB, etc. Its purpose is also to provide helpful reference materials to companies who want to improvetheir ESG information disclosure. As of the end of June 2023, it is comprised of 117 listed companies andinstitutional investors along with 11 other organizations. The subcommittee for improving integrated reports,
subcommittee on human capital, and expert study groups are organized for sharing information.

- We participate as a Full Membership company with our Senior Managing Director, Hiroyuki Horii, serving as a Director, while other SMTAM
employees are members of plan working groups. During the year from July 2022 to June 2023, we held monthly study groups and regular general
meetings in addition to the Subcommittee for improving integrated reports (targeting four listed companies), Subcommittee on human capital
disclosure, and Subcommittee for analyzing the relationship between S-factor and financial value. We also submitted a letter with our commentson the ISSB public draft by the IFRS Foundation. We published a one-year activity report in June 2023. In this way, we strengthened relationships
with member companies and deepened our understanding of ESG information disclosure.

May
2019

This is the Japan branch of the 30% Club, which was established in the UK. It has a global campaign designed
to increase the percentage of women in decision-making bodies at companies including boards of directors. A
common goal is to increase the percentage of women on the boards of directors at TPX100 companies* to
30% by 2030, and their activities are designed to share the importance of gender diversity with top
management through constructive engagement with boards of directors and senior management at investee
companies to contribute to their achievements. For the institutional investor community, best practices forachieving gender diversity with company top management are established and shared for improving ability toengage with all institutional investors.

- We issued progress reports including examples of best practices for engagement in November 2022 and March 2023. We also engaged in a publicawareness campaigns by holding events targeting female senior leaders at TOPIX companies who are main members of the initiative body. SMTAM
President Yoshio Hishida is the chair for the Investor Group and a member of the Steering Committee that is managing organization for 30% ClubJapan, and as the top person, he is taking the lead in managing these.

October
2017

Their purpose is to support proper stewardship activities by institutional investors for contributing to a positive
economic cycle. They support constructive and purposeful dialogues (collective engagement) by institutional
investors through working with companies. In particular, the Forum operates the Institutional Investors
Collective Engagement Program as a way to practice collective engagement for allowing participation by each
institutional investor. As of the end of June 2023, participants include six asset management companies andone asset owner organization. They currently have six agendas, which are Identification of materiality anddisclosure of non-financial information, Scandal handling, Responding to proposals with many against
votes at general shareholders meetings, Explanation of the necessity of takeover defense measures,
Reduction of cross-shareholdings, and Enhancing governance for parent-subsidiary listings.

- We sent letters for each of the six agendas at the left, and practiced collective engagement with several companies who responded. We are also
the lead manager for the Enhancing governance for parent-subsidiary listings agenda, and practiced collective engagement with major steel
companies over the past year.

March
2005

Their purpose is to promote and develop sustainable investment (such as socially responsible investment [SRI]
and ESG investment), which has been practiced in Europe and the US, in Japan.They provide a forum forinteractive exchange and study for people and institutions involved in SRI/ESG investments, as well as thoseinterested in them. Their goal is to encourage companies to publish information to help establish a sustainable
society through the healthy development of sustainable investment.

- SMTAM Senior Managing Director Hiroyuki Horii is a director. Mr. Horii served as a lecturer for the course operated in cooperation with JSIF at
Waseda University Graduate School of Business and Finance. One of our employees also contributed an article to the White Paper on Sustainable
Investment of the JSIF entitled The Impact of Overseas Regulations on Investors in Japan.

November
2019

Their goal is to improve the transmission of information and communication between asset owners andinvestment managers. Their activities focus on management and revision of reporting formats (smart formats),
and the collection and sharing of information on related best practices. They also aspire to promote open
dialogue among members in order to create an environment where results obtained through activities can beshared as assets among all involved in the stewardship industry.

- We participated in meetings for examining revisions to smart formats in 2023, and attended the annual general meeting. We also attended themeeting for exchanging opinions with executives of the Stewardship Asia Centre (an organization that manages and operates stewardshipprinciples in Singapore) held by the JSI in Tokyo, and participated in seminars on corporate governance in Japan hosted by the Consulate-Generalof Japan held in New York, USA.

ICGNThe Investor Agenda

Net Zero Asset Managers
initiative

TCFD Consortium

ESG Information
Disclosure Study Group

30% Club Japan
Investor Group

Institutional Investors Collective
Engagement Forum

24

Japan Sustainable
Investment Forum (JSIF)

25

Japan Stewardship
Initiative (JSI)- We participated in regular meetings held every six months in the US in September 2022 and March 2023. We collected information on corporate
governance, financial markets and regulations, accounting/auditing, and diversity.

* Board of directors: Including audit and supervisory board members for companies with an audit and supervisory board

19

S M T AMA M STEWARDSHIP REPORT 2023/2024

20

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Stewardship Activity Focus Topics
for 2022/2023

Stewardship Activity Focus Topics for 2022/2023
2022

10

Participated in the International Corporate Governance Network (ICGN) Tokyo conference and appeared as a panelist

11

Began collaborative engagement at Finance Sector Deforestation Action (FSDA),
which is an initiative aimed at preventing deforestation caused by increased grain production

Participated in symposium related to the Transition Plan Taskforce (TPT) international conference
Transition Plans: What, Why, When and How? (Tokyo)

Gave a presentation at the Cabinet Office
Study Group on Effective Disclosure and Governance of Intellectual Property Investment and Utilization Strategies (14th)

Appeared at The Asia Investor Group on Climate Change (AIGCC) Japan Working Group Q1 2023 meetingwith the theme AIGCC Member Experience in setting net zero targets (Tokyo)

Appeared as a panelist on the antimicrobial resistance (AMR) subcommittee
at the 9th NIKKEI FT Communicable Disease ConferenceAppeared at events related to the UN Water Conference (Singapore)

Company Chairperson, David Semaya, appeared at the World Climate Summit,
which was a major side event of the 27th Conference of the Parties to the United Nations Framework Convention
on Climate Change (COP27) (Egypt)

12

2023

3

4

Participated in Ceres Paris Aligned Investment Working Group Panel (US)Appeared at the Net Zero Asset Managers (NZAM) Bi-Annual Signatories Meetingas an advisory group representative of the Asian region (Australia, held online)
Appeared at the S&P Dow Jones ETF Conference
under the theme Regulations and Standards. What Comes Next in ESG Investing? (Tokyo)

Participated in events related to the 15th Conference of the Parties to the UN Convention
on Biological Diversity (COP15) (Canada)

SMTAM Chairperson David Semaya appeared at the International Institute of Finance (IIF)
Sustainable Finance Summit (Tokyo)

Appeared at the 2022 Access to Medicine Index Tokyo Conference

2023

1

Participated in the Investors Policy Dialogue on Deforestation (IPDD) Brazil policy (Brazil)
Company President, Yoshio Hishida,appeared at the Study Group for Achieving a Positive Cycle of Women's Empowerment and Economic Growth (2nd)of the Cabinet Office

5Participated in a roundtable of the United Nations Environment Programme Finance Initiative (UNEP FI) (Korea)

Appeared on the PRI Webinar Series: Questions for ESG Experts (5th)2Company President, Yoshio Hishida,appeared at the Follow-up Seminar on Efforts Related to the Net Zero Asset Managers initiative
hosted by The Investment Trusts Association

Appeared as a panelist on theantimicrobial resistance (AMR)
subcommittee at the 9th NIKKEI-FT
Communicable Diseases Conference(Tokyo)He appeared as a panelist on the antimicrobial
resistance (AMR) subcommittee, gave apresentation on our initiatives, and participatedin creating the Tokyo Statement 2022. Heserved as a moderator at the Japan
Pharmaceutical Manufacturers Association
Special Session Establishing a Drug Recovery
Ecosystem for Infectious Disease Area,
facilitated discussions among experts
representing industry, government, andacademia, and summarized therecommendations.

21

Chairperson, David Semaya, appearedat the World Climate Summit of the27th Conference of the Parties to theUnited Nations Framework Convention
on Climate Change (COP27) (Egypt)

Participated in events related to the15th Conference of the Parties to theConvention on Biological Diversity(COP15) (Canada)

We participated in events related to COP15. We
were present at the announcement for thelaunch of the NA100 global initiative that
proposes collaborative engagement for achieving
the purpose of the Convention on Biological
Diversity, which is to comprehensively conserve
biodiversity while using biological resources in asustainable manner, and discussed the purpose
and future development of the NA100 s activities
in panel discussions.
We participated in the World Climate Summit,
which is an event related to COP27. We also
participated in COP26 in Glasgow, UK, making
this the second consecutive year. As at COP26,
SMTAM Chairperson, David Semaya, took thestage in important panel discussions
representing Asian institutional investors, anddiscussed how to resolve climate change issues
together with parties from finance, companies,
government and international organizations,experts on climate measures, NGOs, andinnovators from around the world.

SMTAM Chairperson, David Semaya, appeared at the Net Zero Delivery Summit (London)

6

Appointed as a Glasgow Financial Alliance for Net Zero (GFANZ) Index Investing Workstream Member
SMTAM President, Yoshio Hishida, appeared at the GFANZ Japan Chapter Inaugural Event

President, Yoshio Hishida, appeared at
the Follow-up Seminar on Efforts
Related to the Net Zero AssetManagers initiative hosted by The
Investment Trusts Association (Tokyo)

SMTAM President, Yoshio Hishida, appeared at
the Follow-up Seminar on Efforts Related to the
Net Zero Asset Managers initiative hosted by
The Investment Trusts Association. He explained
the status of our multi-stakeholder engagement
and the implementation of global, efficient, andeffective engagement with around 40 companies
in Japan and around 60 companies outside
Japan that have especially high greenhouse gas
emissions as part of our efforts to reach 2030
interim targets for achieving net-zerogreenhouse gas emissions from investee
companies by 2050.

Appeared at the S&P Dow Jones ETF

Conference under the theme
Regulations and Standards. What
Comes Next in ESG Investing? (Tokyo)

Participated in the Investors Policy
Dialogue on Deforestation (IPDD)
Brazil policy (Brazil)

We participated in a conference under the theme
Mindset and Asset Formation in an Uncertain
Investment Environment: Long-term Investment
and Passive Management Tested in Challenging
Times. We joined in a panel discussion on thetheme Regulations and Standards. What Comes
Next in ESG Investing? and explained our ESG
investment and initiatives for ESG
investment-related regulations including outside
Japan to the over 1,000 participants from aroundthe world.

We visited Brazilian governmental agencies andthe Central Bank as part of IPDD policy
engagement activities, and engaged in dialogue
on how to improve the information foundationand control systems for supporting initiatives forforest preservation in the private sector.

S M T AMA M STEWARDSHIP REPORT 2023/2024

22

Message from the CEO

SMTAM Stewardship Activities

Engagement

Exercise of Voting Rights

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Initiatives for Addressing Issues
with Natural Capital

SMTAM Initiatives for Addressing Issues with Natural Capital

gradually publish individual guidance starting for sectors thatbeen involved in policy engagement with governments in̶Progress toward Developing an International Framework̶

have a greater dependency and impact on natural capital.

addition to engagement with companies.

Since September 2020, we have been the only Japanese

As of the end of March 2023, 71 asset managers around theWe humans have long been benefitting from the abundance found in nature in our daily lives and economic activities,
and these have become the foundation of social and economic activities. Such abundance from nature has been usedas natural resources (including plants, animals, air, water, soil, and minerals), and these have greatly benefited
humans and supported our social and economic activities. Such natural resources have long been viewed as free or
inexpensive. However, the balance between self-benefit and the speed at which natural resources can recover was
lost due to excessive use, climate change, and environmental pollution, which have had a serious impact on society
and the economy. Therefore, it has now become necessary to view natural resources as natural capital stock, andto evaluate and manage these appropriately. According to a 2020 report by the World Economic Forum, natural
capital accounts for about $44 trillion, which is over half of the world s total GDP. Globally, there is a trend ofrecognizing the need to examine dependency and the level of impact from the perspective of maintaining theworld are actively participating in the IPDD (Investors Policythat is a preparatory meeting of the TNFD, and have

Dialogue on Deforestation), which is an initiative that

contributed to the launch of the TNFD through discussions

facilitates policy engagement with governments (responsible

on framework development and future management

parties) in countries where there is a high risk of deforestation
to protect forest resources. Since forest resources play an

methods.

important role in climate change as carbon sinks, it promotes
Climate change framework and global movement toward natural capitalcollaborative engagement with the governments of Brazil and

There are active discussions about forest resources, which are

Indonesia, which have large areas of tropical rainforest, toconsidered especially important as natural capital, since thesestrengthen policies for preventing unregulated land use andhave a significant impact on climate change. At the UN

development. As a result of restrictions on slash-and-burnClimate Change Conference of the Parties (COP26) in 2021,

cultivation in Brazil and the development of sustainable

the Glasgow Leaders Declaration on Forests and Land Use

finance guidelines in Indonesia, policies designed to prevent

relationship between natural capital and economic activities. SMTAM also believes it is important to examine the use

was announced (joined by over 140 countries/regions). At the

deforestation have been implemented with positive results.

of natural capital by companies for their economic activities from the perspective of sustainability.

next conference in 2022 (COP27) hosted by the UK, which

In regard to forest resource conservation in the financial

was the presidency holder for COP26, The Forest & Climate

industry, the FSDA (Financial Sector Deforestation Action)

Leaders Partnership (FCLP) was launched (joined by 27

was launched at COP26. This is an initiative designed tocountries/regions). The FCLP is considering providing funds toprotect forest resources in soft commodity supply chains

Becoming nature positiveand reverse the loss of biodiversity, and specific strategies andIt has been forecast that destruction of ecosystems and loss

action plans were made so that all Japanese citizens can act

emerging countries such as Brazil and Indonesia that will

including beef, soybeans, palm oil, paper, and pulp.

of natural capital will continue as a result of economic

to protect and utilize natural capital.

handle protection of forest resources, which have a major

Engagement is being carried out with major companies that

impact on climate change. Regarding the preservation ofhandle grains in order to help reduce or avoid the risk of

the aim of preventing damage to natural capital andInitiatives for TNFD

natural capital, forest conservation activities alone areforest resource destruction by 2025. Financial institutions

promoting its recovery. At the 15th Conference of the Parties

Regarding the mutual impact of business activities andestimated to require a huge sum of $130 billion annually. In

that have influence on the ground are being requested toto the Convention on Biological Diversity (COP15) held innatural capital, there is a deepening trend to request

order to provide the necessary funds to emerging countries,

avoid supply chain risks.

Montreal, Canada in December 2022, a new global goal on

information disclosure. In June 2021, theTaskforce onvarious projects for leading private investment funds to forest

biodiversity was adopted, referred to as the

Nature-related Financial Disclosures (TNFD) was launched.

conservation are being discussed by related governmental

Using NA100 as an opportunity to strengthen SMTAM initiatives

activities, so a global framework has been established with

K unmin g - M o n t r e al Gl o b al B i o di v e r s i t y F r a m e w o r k

The TNFD disclosed its final framework in September 2023.

parties and financial institutions, and SMTAM has also joined

At COP15 held in December 2022, the international initiative(hereinafter, GBF). The GBF set a goal of 30 by 30 where at

In this, it was recommended that goals be set for maintaining

in the framework development.

by NGOs and institutional investors called Nature Action 100

least 30% of land and oceans are set aside as protected areas

consistency with international initiatives such as the GBF

by 2030 with the aim of halting and reversing the loss ofbacked up by science.

biodiversity by 2030 (Nature Positive).

Whereas the Taskforce on Nature-related Financial

Based on adoption of the GBF, the National Biodiversity

Disclosures (TCFD) is mandated by governments, the TNFD

Strategy and Action Plan 2023-2030 was determined by theis led by the United Nations Environment Program Finance

Kishida Cabinet in March 2023. This strategy was established

Initiative (UNEP FI), the United Nations Development

as a roadmap for achieving Nature Positive by 2030 to halt

Program (UNDP), the Global Canopy (NGO in the UK), and
the World Wildlife Fund (WWF), and it is operated by theprivate sector. Similar to the TCFD, the TNFD requests

Overview of the National Biodiversity Strategy and Action Plan 2023-2030

information disclosure and examinations based on scenario

2050 Vision Society that Coexists with Nature

analysis related to company financial impact on companies

Aim for 2030: Becoming Nature Positive(1) Recover the soundness of ecosystems(2) Use nature to resolve social issues
Basicstrategy(NA100) was announced. Similar to Climate Action 100+
Links between Climate Change Issues and Natural Capital Issues
Activities related to climate change
Up to 2017

Climate Action 100+
signatory / Start of activities

2019

TCFD agreement

2020

2021

companies have due to their business activities including
physical risks caused by the loss of natural capital used inbusiness activities, transition risks mainly due to stricter
regulations, and systemic risks caused by destruction of(4) Recognize the value of biodiversity, and take action during life/consumption activities

ecosystems. On the other hand, the TNFD targets nature

Appointed as amember of Climate
Action 100+ Steering
Committee

CDP
Climate change,
water, forests

Appointed as amember of theAdvisory Committee
in the Asia region for
the Net Zero AssetManagers initiative

Activities related to natural capital

PRI WG
Water, forest conservation, palm oil

Appointed as amember of theInvestors Policy
Dialogue on
Deforestation (IPDD)
Management
Committee

Agreement with statements on deforestation(FSDA activities)

from changes in the natural environment and the impact that(3) Realize a Nature Positive economy

2022
2023

TNFD signatory
Activities related to TNFD
Investor WG

TNFD ForumAppointed as amember of the
TNFD Consultation
Japan Committee

COP27
Sharm el-Sheikh, Egypt

COP15
Kunming & Montreal

Climate Action 100+ Ver. 2(Global Engagement on natural capital)
NA100 activities planned to begin

Source: Created by SMTAM based on various materials(CA100+), the purpose of NA100 is to halt and reverse theloss of nature and biodiversity by 2030 through collaborative
engagement with 100 global companies that have a highdependency and impact on natural capital. Throughcollaborative engagement, investee companies belonging toeight important sectors are requested to evaluate theirdependency and impact on natural capital, set targets anddisclose progress, verify management and supervision of theirboard of directors, and promote initiatives related torestoring natural capital while having dialogue withstakeholders. Investors in Japan and other countries haveagreed to and became signatories of NA100, and full-scale
activities are planned to begin from September 2023. We
joined the NA100 when it was established, and areenhancing our initiatives in harmony with full-scale operationof initiative activities. In addition to enhancing company
information disclosure in accordance with TNFD, we will(5) Establish a foundation for supporting initiatives related to biodiversity and promoting international collaboration

including ecosystems that differ according to region, so as

Goal

Establish progress goals (total of 15) and action goals (total of 25) for each of the ﬁve basic strategies

with the TCFD, it is difficult to measure impact using a single

Initiatives and engagement activities for conserving forest resourcesenhance our initiatives by engagement activities throughAction plan

Measures by the respective governmental agencies for each of the 25 action goals

indicator. Therefore, a multifaceted perspective is needed.

SMTAM also views the conservation and restoration of forest

newly initiated NA100 with the aim of achieving a

Regarding such information disclosure, there is a plan toresources to be an important environmental issue, so we havesustainable society capable of coexisting with nature.

Source: Prepared by SMTAM based on the National Biodiversity Strategy and Action Plan 2023-2030

23

asset manager to participate in this informal working group

S M T AMA M STEWARDSHIP REPORT 2023/2024

24

Message from the CEO

SMTAM Stewardship Activities

Engagement

Exercise of Voting Rights

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Initiatives for Promoting Managementof Human Capital

SMTAM Initiatives for Promoting Management of Human Capitalmanagement to employees, if management strategies including humanpositions,̶Improving Future Corporate Value by Investing in Employees̶

resource strategies are known and established within the organization,

Difference in wages between male and female workers.

and if employees take it upon themselves to understand these. In

However, we believe that such quantitative information disclosure by

The Report of the Study Group on Improvement of Sustainable Corporate Value and Human Capital̶The Human Resources
Edition Ito Report was announced by the Ministry of Economy, Trade and Industry in 2020, and the Kishida Cabinet then clearly
indicated the expansion of investment in people in order to achieve a new form of capitalism in the Basic Policy on Economic
and Fiscal Management and Reform 2022 (hereinafter, Basic Policy 2022 ), so human capital management is drawing greaterattention. Human capital management refers to a management method where human resources are viewed as the capital of
corporate activities, and their value is maximized for improving sustainable corporate value. According to the revised Basic
Policy 2023, the aim is to promote a virtuous cycle of wages and prices through systemic raising of wages based on resultsfrom trinity labor market reforms, and to promote expansion of private investment centered on investment in people bystimulating public investment in order to create a society where diverse human resources help improve company productivity.

Percentage of male workers who took childcare leave, andaddition to spreading DE&I*, creating a comfortable work environment,

companies is still insufficient. In order to fill the gaps that exist as seen

managing a safe work environment, and improving well-being, we

by current numbers and future goals, we believe it to be necessary forbelieve it is important to have employee engagement to verify thecompanies to explain what initiatives they will take as part of their story.

effectiveness of these.

For example, they need to explain why there is a difference in wages
between male and female workers, and also disclose what initiatives

Global human capital disclosure

they will take to eliminate this gap along with proper goals, KPIs, andSince information related to human capital is a useful index for

progress status. From now on, it seems necessary to reference thedetermining future corporate value, there is a worldwide trend toward

Guidelines for Human Capital Visualization (August 2022) and the 11

companies proactively disclosing such information. Human capitalareas of ISO 30414 set by the International Organization fordisclosure has already started to be mandated in the EU (2017) and theStandardization (ISO), etc., as companies devise a more persuasive value

US (2020). In Japan, the Cabinet Office Order on Disclosure ofcreation story by setting their own specific disclosure items for

Corporate Affairs was revised and went into effect in January 2023,

improving corporate value.

which mandates the disclosure in the securities report starting from thefiscal year ended March 2023. This targets around 4,000 companies,
Reason for focusing on human capital management

as a priority item in G (Governance) from the perspective of promoting

which are mainly listed companies.

The reason for focusing on human capital management is due todiversity with boards of directors. This is because the ratio of females inIn the securities report, Philosophy and initiatives related tochanges in the corporate environment. In Japan, there is a need to

executive positions and the ratio of foreign employees, which arerecruit women, seniors, and foreigners in order to compensate for the
decline in the number of workers as a result of a declining birthrate and1Compliance and ethics

sustainability was newly added, and disclosure of Governance and

2

Cost

in-house human resources for candidates as directors, are keys to

Risk management is mandatory according to the General

3

Diversity

diversity with future boards of directors.

sustainability section. While companies can use their discretion

4

Leadership

5

Organization culture

Policies

6

Organizational health, safety, and well-being

7

Productivity

8

Recruitment / Allocation / Turnover

9

Skills and ability

10

Successor development plan

11

Labor force

aging population, which will require changes in the existing uniform

25

11 areas on human capital disclosure in ISO 30414

according to the importance for disclosure of Strategy and Indicators

human resource management method to adopt more flexible working

Proposing human capital investment in the value creation story

and targets, they must disclose about Human capital including diversity

styles according to needs of employees. COVID-19 forced companies to

One reason that companies implement human capital management isof human resources,

Diversity in securing human resources,

accelerate work style reforms such as establishing remote work, andbased on the perspective of proactively improving corporate value

for developing human resource, and Policies for building the internal

review of human resource systems.

through financial and non-financial evaluations by the company itself, andenvironment. Also, Employee status was enhanced by requiring

Looking at global trends, we are entering the fourth industrial revolution

not just based on changes in the outside environment. Allocation of

disclosure of the Percentage of female workers in management

where AI and robots are used to optimize work. This shift makes it

human resources to the proper position through visualization ofdifficult for companies to differentiate themselves merely by extending

employee skills and improvement of skills through human capital

existing ideas and technologies. Innovation is essential for improving

investment result in better work productivity. Also, maintaining andcompetitiveness, and human resources are the ones who bring thisimproving motivation through strategic human resource development canabout. The aim of human capital management is to create an

help to improve each employee s sense of belonging. Moreover,environment that maximizes the use of diverse human resources as thecompanies that focus on human resource development have a higher

source of innovation, and maximizes the abilities of each individual

likelihood of acquiring excellent human resources by gaining higher

employee.

evaluations in the labor market. As a result, companies that implement

Human capital management is also compatible with requests fromhuman capital management are more likely to increase corporate valuesociety such as Goal 8 of the SDGs, which is to Promote sustained,

in regard to both financial value (economic profit) and non-financial value

inclusive and sustainable economic growth, full and productive(social value).

employment and decent work for all, as well as with the promotion of

However, in order to realize human capital management, management

diversity, and human resource development. The purpose of humanstrategies and human resources strategies must be aligned and be

capital management is to enhance job satisfaction by providingreflected in the value creation story. It is essential to recognize the gaps

opportunities for employees to acquire skills and an environment where

between future vision outlined by the top management and the current

it is easy to work, thereby achieving corporate and economic growth.

situation both quantitatively and qualitatively, and to set human resource

The stock market also views having both improvement of medium- to

strategy goals and proper KPIs for implementing the necessary measureslong-term corporate value and resolution of social issues through humanto overcome these gaps. It is necessary to verify the effectiveness ofcapital management as important from the perspective of ESG

these measures, review human resource strategies as necessary, andinvestment. Regarding our 12 ESG Materialities, we have listed human

work toward achieving company ideals through initiatives.

capital management as part of Human Capital and Safety &To implement such human resource strategies, it is also important to目標
Responsibility
in the S (Society) in ESG, and have positioned it as aestablish these as part of the corporate culture. Strategies will be morepriority area for engagement with investee companies. We also view it

effective if the corporate philosophy and purpose are shared from

Human capital disclosure in securities reports[Business status] Philosophy and initiatives related to sustainability added

Source: Prepared by SMTAM based on materials of the International Standardization Organization (ISO)General sustainability
Governance
Disclosure required
Risk management
Strategy

Disclosure is at thediscretion of the company

Indicators and targets

according to its importance

Human capital including diversity of human resources (Strategy along with indicators and targets)

Disclosure required

resulted in neglecting investment in people. Companies lost their ability
to innovate while creating stiff work environments that lowered
an opportunity to encourage investee companies to strengthen theirinitiatives for human capital management by our engagement activities.
We will proactively support investee companies to improve their value

Policies for building the internal environment[Employee status] Disclosure based on Act on Promotion of Women s Active Engagement in Professional Life added
Percentage of female workers in management positions
Percentage of male workers who took childcare leave

People are assets. However, after the collapse of Japan s economic
bubble, there was a prolonged period of economic stagnation thatcompetitiveness. We view enhancement of human capital disclosure as

Diversity in securing human resources
Policies for developing human resource

Promoting human capital management through engagement activities
In Japan, there are sayings such as, A company is its people andby requesting them to share qualitative and quantitative information on
how effectively human capital is being utilized in accordance with theirown purpose, vision, and mission. We will also engage in discussions toDisclosure required

Diﬀerence in wages between male and female workers

Source: Prepared by SMTAM based on the revised Cabinet Office Order on Disclosure of Corporate Affairs

ensure that their management strategies and human resources
strategies are coherently included into their value creation story.
* Abbreviation for Diversity, Equity & Inclusion.

S M T AMA M STEWARDSHIP REPORT 2023/2024

26

Message from the CEO

SMTAM Stewardship Activities

Engagement

Exercise of Voting Rights

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Initiatives for Cross-Shareholding Reduction

SMTAM s Philosophy on Cross-Shareholding
and Initiatives for its Reduction
Figure 1: Items describing cross-shareholdings in Japan s Corporate Governance Code, etc.

Introduction

Japan s Corporate Governance CodeCross-shareholding refers to a unique shareholding style in Japan where shares are held in another company for the purpose ofstrengthening business relationships or preventing takeovers. In addition to cases of mutual holding of shares referred to as
cross-shareholding, there is also a method called unilateral shareholding where a company unilaterally owns shares in anothercompany. Why are there so many negative articles and opinions on cross-shareholding?

Historical Background on Cross-Shareholdings

Guidelines for Investor and Company Engagement (Extract)

Principle 1.4(2) Cross-Shareholdings

When companies hold shares of other listed companies as cross-shareholdings, they should[Assessment of Cross-Shareholdings]

disclose their policy with respect to doing so, including their policies regarding the reduction

Whether the assessment of holding eﬀects is suﬃcient based on the perspective of theof cross-shareholdings. In addition, the board should annually assess whether or not to holdcommon interests of shareholders, for example through the eﬀective involvement ofeach individual cross-shareholding, speciﬁcally examining whether the purpose is appropriate

independent external directors.

and whether the beneﬁts and risks from each holding cover the company s cost of capital.

[Relations with Cross-Shareholders]

The results of this assessment should be disclosed. Companies should establish and disclose

When cross-shareholders (i.e., shareholders who hold a company s shares for the purpose of

speciﬁc standards with respect to the voting rights as to their cross-shareholdings, and vote incross-shareholding) indicate their intention to sell their shares, does the company hinder the saleaccordance with the standards.

of the cross-held shares by, for instance, implying possible reduction of business transactions?
Does the company engage in transactions with cross-shareholders which may harm theinterests of the company or the common interests of their shareholders by, for instance,
continuing the transactions without carefully examining the underlying economic rationale?

Cross-shareholding is defined in the Cabinet Office Order on Disclosure of Corporate Affairs as shares that are held for a purpose

Source: JPX, Financial Services Agency

other than pure investment among stocks categorized as investment securities that are recorded on the balance sheet.
Cross-shareholding was a practice by former Zaibatsu conglomerate companies, of which the holding headquarters were forcibly
disbanded just after World War II, in order to strengthen mutual relationships. The purpose was to build stronger grouprelationships by mutually owning shares in the other company. Later, cross-shareholding became a common defense measureagainst takeovers by overseas companies due to capital liberalization, and it was viewed as a characteristic of the corporate
finance and corporate governance of Japanese companies until the 1980s.
In 1990, the economic bubble collapsed, and in the financial crisis that followed, cross-shareholding between banks and generalcompanies began to dissolve. Reasons included, (1) increased risks related to owning bank stocks as a result of bank rating
downgrades and bank failures, and (2) banks needing funds to write off bad loans. Starting from 2000, as a result of legal
amendments (Act on Limitation on Shareholding by Banks and Other Financial Institutions), shareholding by banks became limited
to the scope of equity capital, and changes to accounting standards that required fair market valuation of securities increased
accounting risks with stockholding, which reduced cross-shareholding.
From the mid-2000s, however, cross-shareholding began to become more common with some companies. Reasons included theincrease in the number of hostile takeovers and increased ownership by foreign investors. There are still cases where capitaltie-ups = cross-shareholding in connection with business alliances.

In order to respond to issues related to cross-shareholding, we have positioned its reduction as a priority agenda for our
stewardship activities.
We established SMTAM s 12 ESG Materialities for engaging with investee companies, and reduction of cross-shareholding is an
essential engagement agenda item when requesting a stable and fair governance system for Governance (G).
We also are enhancing our initiatives in regard to the exercise of voting rights. In our revised Principles for Exercising Voting Rights
in January 2023, we stated that if a company has excessive cross-shareholdings (top 10th percentile of TOPIX (TSE Stock Price
Index) companies in terms of the net asset ratio), we will object to the appointment of directors who have served for three years
or more. In the meantime, targets are TOPIX500 companies, and we consider expanding the target scope in the future.
While carrying out such activities, more investee companies have committed to proactively reducing their assets undermanagement and to the reduction plan (see Figure 2). In some cases, shares in major business partners were sold, so we expect
to see a greater divergence between business relationships and capital relationships. There is a recent trend for companies tomention about their reduction efforts in the convocation notice for the general meeting of shareholders, or to disclose their
reduction efforts in their financial results briefing materials and company website. We view such actions as an indication that

Issues SMTAM Sees with Cross-Shareholding

companies are changing their behavior.

Although there are positive opinions that cross-shareholding helps to promote stable management from a long-term perspective by
becoming mutual stable shareholders for companies with whom they have a good relationship or business partnership, while also
restricting shareholder intervention in management from a short-term perspective, it results in cooperative business relationships
and capital relationships that are unique to Japan. While it is true that collaborative relationships that involve capital contributions,

The assets under management for all listed companies appear to be declining (see Figure 3). In the context of rising TOPIX stock
prices, we view the decline in the level of the top 10th percentile for the ratio against net assets positively. We conductengagement through constructive dialogue with investee companies based on an understanding of the reason and circumstances
for holding shares, as well as reduction plans. We also engage with parties that compel other parties to hold shares in certain

including capital alliances and joint ventures, exist globally, in most cases, collaboration details such as business transactions andcases in order to reduce the overall cross-shareholding balance and resolve related issues.

co-development are clearly defined. Japan s Corporate Governance Code states that they should disclose their policy with

Figure 2: Cases with major reductions or with reduction plans
for the fiscal year ended March 2023

respect to doing so, including their policies regarding the reduction of cross-shareholding. However, we believe there are thefollowing issues related to cross-shareholding.
■ Hollowing of voting rights

By establishing stable shareholders, proposals favored by a company tend to be
proposed and approved at general meetings of shareholders, creating concernthat there is no effective monitoring by outside shareholders, which results inloss of management discipline.

■ Principle of shareholder equality

If transactions between companies are performed on the premise ofcross-shareholding, there is concern that favor may be given to specificshareholders. If they receive profit (investment return) that cannot be acquiredby general shareholders, it violates the principle of shareholder equality.

■ Worsening capital efficiency

Using funds intended for company growth to engage in cross-shareholding may
interfere with efficient management and, therefore, hollow out the capital.

27

SMTAM s Activities for Reducing Cross-Shareholding and Trends for Reducing Cross-Shareholding

Case■ Accounting risks

Although cross-shareholding is recorded on the balance sheet, it is also an
unused risk asset. If this impacts profit and loss statements and balance sheets,
it cannot be called efficient capital management.

■ Guaranteeing superior position

This is primarily an issue for the party compelling a business partner to hold theshares, which can be considered an abuse of a superior bargaining position
under the Antimonopoly Act. This can damage the interest of generalshareholders.

Cases with alarge reduction
rate (amount)Cases where a
reduction plan
was disclosed

Company nameContents

NSK Ltd.

Due to a partial sale of deemed shares held for pension contribution, theratio of the balance of net assets (referred to as ratio in Figure 2) is 15.1%
as of the end of March 2023, which is a signiﬁcant reduction compared to
28.0% at the end of the previous ﬁscal year

KeikyuCorporation

Reduction has been promoted with the goal of having a ratio including
deemed shares held of 20% or less by the end of the ﬁscal year ending
March 2024, which is the ﬁnal ﬁscal year of the medium-term management
plan. It was 24.3% at the end of the ﬁscal year ended March 2023, which ismuch lower than the 31.2% at the end of the previous ﬁscal year

Dai Nippon
Printing
Co., Ltd.

Although the ratio at the close of the ﬁscal year ended March 2023 was
26.6% (33.5% at the end of the previous ﬁscal year), a plan was announced toreduce this to below 10% by the end of the ﬁscal year ending March 2028

SHIMIZUCORPORATION

Although the ratio at the close of the ﬁscal year ended March 2023 was
30.7% (34.2% at the end of the previous ﬁscal year), a plan was announced toreduce this to below 20% by the end of the ﬁscal year ending March 2027

Source: Prepared by SMTAM based on securities reports and other materials

Figure 3: Top 10th percentile level of TOPIX stocks regarding net asset ratio,
and TOPIX trends
Top 10th percentile level of TOPIX stocks regarding net asset ratio (Left)

2000

TOPIX (Right, end of March, Unit: p)

1500

30%

1000

20%
10%

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

500

(Fiscal year)

Source: Prepared by SMTAM based on Quick data

S M T AMA M STEWARDSHIP REPORT 2023/2024

28

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

Engagement that Contributes

Engagement

to Improved Investee Corporate Value

Example Cases - Japan

Performing Engagement that Contributes to Improved Investee Corporate Value
Our engagement targets for Japanese equity are all brands
held mainly in TOPIX (Tokyo Stock Price Index) composition

Engagement target universe
All brands held mainly in TOPIX composition brands (2,500 stocks)

brands. Up to this time, we have engaged with a broad
range of companies representing roughly 90% of the market
capitalization of TOPIX companies.
Our mission is to maximize medium- to long-term return on
investment for clients by improving corporate value over a

Top-down approach

Market cap approach

Risk approach

Selection basedon 12 ESG materialities

Consider the importanceof market capitalizationand management issues, etc.

Mainly companies
that were voted against
and those involvedin scandals

medium- to long-term period for investee companies, andReference

Disclosure of Climate-related Financial Information under TCFD

Engagement Example Cases - Japan
CASE 1Company A
in the non-manufacturing sector- Cross-shareholding- Addressing climate change

Analyst s Perspective
Although they are working to reduce cross-held shares, the speed is slow and their initiatives are insufficient. The market expects themto accelerate their reduction initiatives. Regarding their response to climate change, their response policy was published. They havehigh exposure and there are no interim targets set for the whole group. I think this attitude toward initiatives is the cause of their
slump in corporate value.

Bottom-up approachacquiring excess return through investment while raising the

ESG Integration

market as a whole. To accomplish these, we identify issues with each investee company, and conduct effective and efficientengagement. Our engagement consists of (1) the market cap approach, (2) the risk approach, and (3) the top-down
approach. We select target companies for the top-down approach on the basis of our 12 ESG materialities, and perform
stage management for engagement.

Generally, it is best to have no cross-held shares. It seems
necessary to set ultimate goals and disclose their reduction planfor this. In order to improve capital efficiency, it seems
necessary to allocate cross-held shares that are no longer
needed to business investment. The reduction speed is slower
than the previous year, but the market expects them toaccelerate their reduction initiatives. We also want them to use
market price for setting reduction targets since risks withcross-shareholding should be evaluated using market price.

SMTAM Engagement Process
Prepare opinions

Rec
or
d

Pre
pa
r

ons
ini
op

Check in advance

d
an

e

To achieve effective engagement, our analysts use non-financial information analysis results andthe like to help them identify management issues and formulate effective and coherent opinions

r
nito
mo

We first submit the opinions formulated by each analyst to an internal review. This both
helps improve and standardize opinion quality among the analysts

Opinion from SMTAM
Some reduction targets for greenhouse gas are limited tooriginal unit targets, so the overall reduction amount is notclear. It seems necessary to establish 2030 interim targets thatcan easily be understood externally.

Company Response

Express opinions

nc

o

ni

ad

ss

va

re

pi

Record and monitor

We take the matters that were pointed out seriously, but wecannot simply say our goal is zero. We need to respondaccording to the opinion of the holder. Honestly, we also want
to reduce this as much as possible, but we need to be cautiouseExp

Our analysts meet with the investee company management group and express theiropinions. At each meeting, a written oath stating the analysts will not make any material
proposals nor acquire insider information is signed and mutually recognized

on

s

Che

After the meetings, we record investee companies responses to the analysts opinions. We
monitor the companies for any changes in management and then utilize this information
when identifying management issues for the next engagementck

inbecause we have received bans or trading halts in the past.

We believe it is important to set goals according to ourbusiness situation, so we have begun responding to business
partners from industries with high emissions. Even if we set
top-down goals, they are not meaningful. We will set meaningfultargets and indicators while implementing initiatives.

Corporate Action
Transition of ratio of the number of companies taking corporate action* to the number of companies engaged (Accumulation)(Unit: Companies)(Unit: %)400
350

Ratio of companies taking corporate action

300

32％
26％

250
200
150

18％

16％

14％

19％

34％

365

252

25

201

20
15
10

64

Evaluation by SMTAM / Future Policy
We will monitor their progress toward enhanced reduction targets. As for reduction after the medium-term management plan, we willencourage them to set a goal of zero balance as the ultimate goal.
Regarding their response to climate change, we will confirm their progress toward reduction targets set by the company, and willencourage them to set total emissions and overall reduction targets as 2030 interim targets.

5

35
End of June 15

40

30

285

99

50

45

Their aim is to respond gradually by industry, and to coverabout 70% of their emissions by the end of FY2023.

35

330

141

100

0

38％

Number of companies taking corporate action (Accumulation)

41％

Announced enhancement of the reduction plan forcross-shareholding in their financial results briefing materials in
May 2023. Plans for reducing the net asset ratio to below 20%
on a market value basis and policies for continuing reduction
were presented.

End of June 16

End of June 17

End of June 18

End of June 19

End of June 20

End of June 21

End of June 22

End of June 230* Only actions that are in harmony with the opinions expressed by our company are counted. *See pages 30-32 for specific examples.

29

S M T AMA M STEWARDSHIP REPORT 2023/2024

30

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Engagement Example Cases - JapanCAS E 2Company B
in themanufacturing sector- Performance-linked
remuneration

Analyst s Perspective

Opinion from SMTAM

Company Response

Corporate Action

Evaluation by SMTAM / Future Policy

Their corporate value has not improved for morethan 10 years. In their remunerations for
executives, the ratio of fixed remunerations ishigh, and details related to performance-linked
remunerations including the calculation method
have not been disclosed. Also, they haveexcessive cross-held shares, and although
reduction has been progressing, these accountfor a major part of the balance sheet, so I believe
they need to present a reduction plan.

Their remunerations for executives consist of fixed remunerations and performance-linked
remunerations, but the ratio of fixed remunerations is 65%, which is high, so it is not clear whether
these function properly as an incentive. It seems necessary to raise the percentage ofperformance-linked remunerations and to consider implementing stock remunerations.

We have now implemented an executives stock ownership plan that
accounts for about 10% of fixed remunerations. Our management is in linewith profits from the perspective of shareholders, and we always consider
implementing new short- to long-term incentives. We will deepen discussions
on detailed disclosure for remuneration for executives.

Announced introduction of a stock compensation
system in May 2022 that is designed to raise the ratioof performance-linked remunerations. Details on thesystem for remuneration of executives were disclosed
in the integrated report issued in August 2022.

As for cross-held shares, reduction is progressing and the number of some stocks is decreasing, but
the ratio on the balance sheet is high. According to SMTAM s Principles for Exercising Voting Rights,
our policy is principally to object to proposals on the election of directors from companies withexcessively concentrated share ownership, which applies to this case. We want them to disclose
their reduction plan with target standards and specific achievement times to indicate their attitude
toward future initiatives.

The industry we are a part of focuses on sales, and we have long-term
customers, so we have owned their shares in order to strengthen relationships.
Although we have been working on reduction from the perspective of capitalefficiency, we will need to link this to business investment and share buybacks
as a way of improving ROE. We also recognized that our explanations havebeen lacking, so we will improve disclosure.

Announced accelerated reduction of held assets intheir basic management policy published in
February 2023. Announced sales targets forcross-held shares in March of the same year.

After the stock compensation system isimplemented, we will confirm that the linked
remunerations ratio has been raised, and will
monitor its effectiveness.
Regarding the reduction of cross-held shares, wewill monitor the progress status of initiatives forachieving set targets and the effectiveness ofresource distribution for helping to improve
corporate value.

- Cross-shareholding

CAS E 3

Analyst s Perspective

Opinion from SMTAM

Company Response

Corporate Action

Evaluation by SMTAM / Future Policy

The current stock price is likely below PBR 1 as areflection of the risk of becoming a stranded
asset due to climate change. It s necessary tohave a business portfolio strategy that is linked
with a response to climate change issues.

There has come to be a stricter view of fossil fuel interests as a result of climate change issues. They
have the risk of becoming a stranded asset in the future, so it seems necessary to always take sale ofinterests into consideration when conducting business management. Although the rise of resource
prices may contribute to higher performance in the short term, profit contribution is greatly impacted
by market fluctuations, so it is a good time to sell while the market is good. We want them topresent their business portfolio conversion/transition plan, and to clarify their resource distribution
policy for using acquired resources in the area of decarbonization rather than simply reducing
greenhouse gas emissions.

We recognize that the fossil fuel business is drawing greater attention, and wehave also discussed the risk of becoming a stranded asset in the future.
However, we have no intention of immediately withdrawing business basedon the situation in Japan because of our responsibility as a supplier. We will
implement initiatives for reducing our environmental load by providing
solutions such as development of alternative fuels and mixed combustion.

As part of the new medium-term management
plan that was announced in November 2022, arevised greenhouse gas reduction plan andinvestment plan were disclosed. New targets wereset for the 2030 revenue composition rate.
Since announcing the sale of their overseas fossil
fuel interests in February 2023, held fossil fuelinterests were greatly reduced.

Regarding their greenhouse gas reduction plan, although 2030 interim targets and carbon neutrality
by 2050 have been set, these are the targets for Scope 1+2 *1 and no targets have been set for
Scope 3, which accounts for 90% of emissions. It seems necessary to set targets including for Scope
3 that align with the Paris Agreement, and to acquire SBTi*2 certification.

Our main business itself is the target of greenhouse gas Scope 3 emissions.
There are requests to reduce the total usage amount in Japan by 80%
compared to 2020 by 2050, and our company also expects reductions in linewith this. We believe that the remaining 20% will need to be addressed byabsorption and sequestration technologies of greenhouse gases, so we will only
commit to our own reduction targets for Scope 1+2. We also recognize theneed to set targets including for Scope 3, but we have not been able to do so.

They announced their plan to reduce its capacity
by 30% in their new medium-term management
plan in November 2022. Based on this, 2030
Scope 1+2 reduction targets were revised upward,
but they postponed setting of targets for Scope 3.

They retained some fossil fuel interests from theperspective of their responsibility to provide astable supply. We will continue to monitor the
progress of their initiatives with low carbonizationby providing alternative fuels, etc., and monitor
their business that is at risk of becoming a
stranded asset.
We will request that they promote initiatives forachieving 2030 revenue composition ratio targets
as early as possible. In particular, regarding use ofalternative fuels, we will request that they ensure
the sustainability of raw material procurement aswell as traceability.
As for the setting of Scope 3 targets, we willencourage them to grasp the necessity and set
targets by introducing examples from othercompanie s, and share concep t s on se t tingenvironmental targets in the value chain.

Company C
in themanufacturing sector- Business strategy- Addressing climate change

CAS E 4Company D
in themanufacturing sector- Sustainable procurement
and human rights due diligence- Corporate governance

CAS E 5Company E
in themanufacturing sector- Business portfolio review- Employee engagement

Analyst s Perspective

Opinion from SMTAM

Company Response

Corporate Action

Evaluation by SMTAM / Future Policy

In addition to addressing climate change,
preserving natural capital and biodiversity, andconsidering human rights in their supply chain are
essential for stable and sustainable business
management. However, these initiatives are notclearly mentioned in their disclosure information.
In order for their board of directors to have aproper composition as a company aiming tochange their business portfolio and restructure
their business model, I believe they need to
implement initiatives for enhancing corporate
governance such as by disclosing the concept of
their process for appointing and dismissing
directors and ensuring the independence of
external directors.

Regarding human rights due diligence, we recognize that they are currently in the pilot survey phase.
In order to improve the sustainability of main raw material procurement, they need to identify humanrights risks, conduct external audits, disclose evaluation results, and establish a contact point forhandling complaints including indirect business partners, and then handle complaints. It seems
necessary to have them show milestones toward establishing a human rights due diligence system,and to improve information disclosure on the progress status.

Regarding initiatives for improving the sustainability of main raw materials, wehave already begun responding starting with the grievance mechanism, have
set up a contact point on our website, and are proceeding with responses.
We have also completed evaluations for 60% of our business partners via
third-party organizations, which covers 89% of our monetary base. We plan tonearly complete assessments by 2023. We have implemented these initiatives
for improvements, and we will consider disclosure in the future.

It seems necessary for them to aim to have a proper composition of directors in harmony with theirideals through planned and regular changes with directors. There are very few TOPIX companies thathave external directors with tenures of over 12 years, and it is a violation of our Principles for Exercising
Voting Rights. Simply stating that the term of office is only one year and the qualifications for candidates
are not a sufficient explanation for the independence of external directors. It seems necessary to havethem explain the reason and background of those who are candidates for re-election by showing theirconcept on the tenure of external directors and their discussion process for appointing successors.

We understand SMTAM s Principles for Exercising Voting Rights regarding theindependence of external directors. We will send our opinions on the
independence of our external directors in writing, so please refer to thesewhen deciding about the exercise of voting rights.

They announced their long-term management
strategy and equipment investment plan that will
promote diversity with the procurement of raw
materials. They determined their global humanrights policy and disclosed their policy on
respecting international human rights regulations.
R e g ar ding human right s due dilig ence, the ydetermined their onsite audit plan for tracking
down raw materials to cultivation farms incollaboration with third-party organizations. They
also established a grievance mechanism in the
supply chain in collaboration with third-party
organizations, and began operating it.
They showed their policy for future quarterly
information disclosure, and set goals in addition to
KPIs on human rights.

Engagement goals were achieved in regard tosustainable procurement and human rights due
diligence. We will continue engagement for
improving the sustainability of their corporate
activities and their corporate value.
At their general meeting of shareholders, proposals
were made for re-election of external directors withlong tenures. Since they did not provide a sufficient
explanation for applying any exception, we voted
against their proposals for the election of directors
based on our Principles for Exercising Voting Rights.
Regarding their proposals for electing directors, wewill continue requesting that they select external
directors who have independence and who cancontribute to improving viability.

Analyst s Perspective

Opinion from SMTAM

Company Response

Corporate Action

Evaluation by SMTAM / Future Policy

When considering their next medium-term
management plan, simply showing ROE targets
along with financial strategies is not enough to
improve corporate value. They need to explain
their roadmap for improving ROE by enhancing
monitoring of their business portfolio based on
ROIC and by reviewing their business portfolio.
Although they set targets for their employee
engagement indicators, their roadmap for futurefinance is unclear. It also seems they need to
explain how it relates to finance and improved
corporate value.

Their ROE has remained low, so it may be a violation of the performance standards in our Principles
for Exercising Voting Rights for three consecutive periods. In order to achieve an ROE of 8% asquickly as possible, in addition to financial strategies such as buybacks, it seems necessary for themto enhance monitoring of their business portfolio using ROIC, and to select and focus on a businessportfolio. We want them to improve their ability to explain things by clearly showing their roadmap
for improving ROE in their next medium-term management plan.

It became possible for us to understand capital efficiency for each business bytransitioning to a company system, but we also could see the need toenhance ROIC management because the impact from market contraction insome businesses resulted in lower capital efficiency in focused businesses.
When we prepare our next medium-term management plan, we will consider
disclosing information so that investors can understand how becoming acompany that focuses on a particular business helps improve corporate value.

Their business performance is improving, so they could
avoid violating the business performance standards in our
Principles for Exercising Voting Rights. However, in their
new medium-term management plan announced in March
2023, there was not enough disclosure on the transition
to a company focusing on their core business throughROIC management, or their roadmap for improving ROE.

For our next medium-term management plan, in addition to financial targets
during the planning period, we are considering setting goals related tolong-term financial value by responding to sustainability issues. We believethat human resources are a source of added value, and are therefore an
investment, not a cost. We will ensure diversity and monitor engagement
indicators, etc., while confirming the link with client evaluations and sales, andwill explain how these initiatives lead to increased corporate value.

In their new medium-term management planannounced in March 2023, human capitalmanagement was set as a core management
strategy, employee engagement indicators wereset as KPIs, and earning power per employee wasspecified. They announced their policy for
improving their ability to generate funds byincreasing revenue from their service business andoptimizing their workforce in other businesses.

Although ROE was set in their new medium-term
management plan, the explanation of their reviewof the business portfolio using ROIC and thebusiness portfolio transition was insufficient. We
will continue with engagement for improving theirability to explain their improvement initiatives in
addition to their information disclosure.
Engagement goals regarding use of employee
engagement indicators were achieved. We willcontinue monitoring whether improvements topresented indicators lead to actual improvementof corporate value.

Although employee engagement indicators exceed targets, improvement from engagement did notlead to improved business performance. It seems that expansion of sales, improved productivity, andtheir approach to improving added value are not clear from the outside. If they are able to include
engagement scores as a future finance target in their next medium-term management plan, we wantthem to explain how it relates to finance and improved corporate value so that these initiatives willlead to improved corporate value.

*1. Based on GHG (greenhouse gas) protocols, emissions are categorized and accounted for by Scope 1 (direct emissions), Scope 2 (indirect emissions, such as from electricity), andScope 3 (emissions from other companies, such as via supply chains).

31*2. Science Based Targets Initiative: Collaborative initiative for setting climate targets based on science.
Established by CDP (international NGO), United Nations Global Compact (UNGC), World Resources Institute (WRI), and World Wide Fund for Nature (WWF).

S M T AMA M STEWARDSHIP REPORT 2023/2024

32

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

ESG Integration

Disclosure of Climate-related Financial Information under TCFD

Reference

Engagement Example Cases - Global

Engagement Example Cases - Global
At SMTAM, our emphasis on ESG engagement activities extends worldwide. We focus on (1) engagement activities
that are based on action principles or guidelines, such as the PRI, (2) activities aimed at addressing misconduct andother problems in accordance with international norms, and (3) independent activities aimed at promoting greater
efficiency in corporate management and the establishment of outstanding corporate governance. Target companies
were selected by referring to information from collaborating organizations and initiatives, and activity policies andgoals were set based on our ESG engagement topics.

CAS E 6
A.P. Moller-Maersk(Denmark / Marine transport)- Climate change issues- Information disclosure

CAS E 7
Swiss Life Holding(Switzerland / Insurance)

Perspective of Engagement Specialist

Opinion from SMTAM

Company Response

Corporate Action

Evaluation by SMTAM / Future Policy

As a major European marine transporter, in 2018, they
were one of the first in the marine transport industry to
set the goal of being carbon neutral by 2050. Later, inJanuary 2022, they set aggressive goals related toclimate change such as by moving their goal forachieving net zero up to 2040.
However, disclosure of their progress including
quantitative goals for specific initiatives is stillinsufficient, and as a global leader in the marinetransport industry, further initiatives are needed.

In order to increase the probability of achieving ambitious goals, it
seems they need to actively disclose information related toengagement with their supply chain in addition to establishingvarious measures.
Their policy is to transition 25% of fuel to green fuel by 2030 forachieving their goal, but there has been little progress, so we wantthem to disclose information on measures for increasing theprobability of achieving their goal.

To increase usage of green fuel, which is the key to reducing
greenhouse gas emissions for marine transport, we concluded
supply contracts with eight energy companies, and we havetaken measures to increase confidence in the plan such as byshowing the management stage of price pass-through for eachsupplier.
At the same time, specific investment plans need to be
examined for using green fuel. Since there are different types ofgreen fuel, we have to consider future changes related totechnology and supply and demand when making investment
decisions.

To increase the probability of achieving
their ambitious commitment, they are
managing the stages of their response
status to price pass-through for eachsupplier, and disclosing information on
their plan to secure green fuel withenergy companies.

- We have proactively engaged in dialogue via email,Archer Daniels
Midland(US / Wholesale of agricultural products)(Australia / Power company)- Climate change issues- Information disclosure- Our policy is to continue engaging in dialogue toencourage them to continue promoting aggressive
initiatives as a leader in the industry.

Opinion from SMTAM

Company Response

Corporate Action

Evaluation by SMTAM / Future Policy

We confirmed that there has been an improvement in the ratio of
female directors from about 18% in 2019 to about 25% in April
2022, but this is still insufficient. We believe that 30% is a goodstandard based on knowledge gained from initiatives such as the
30％Club and trends with other European companies. We want toconfirm their awareness of the issue and their strategy for
improving diversity.
At the general meeting of shareholders in 2022, we raised concerns
about gender imbalance and the governance system, and voted
against the proposal for re-election of the nomination committee
chairperson. We want to see how they respond and theexamination status.

Globally, our gender ratio for employees is around half, but theratio of female directors is still around 25% even after adding
another female director in 2022. We are very aware that ourinvestors want to see improvement and we will make every effort.
Although the ratio of female executives has increased slightly, weare continuing to make improvements and are working to change
the mindset inside the company. In recent years, we have been
focusing on providing in-house education including training for new
employees, so our policy is to promote people based on skill.
There are some areas where improvement is needed including
unevenness with departments and insufficient disclosure ofini t ia t i v e s f o r hir in g e x p er t s , s o w e w il l di s c u s s f u t ur e
improvements.

At the general meeting of shareholders inJune 2023, female directors wereincreased and they now over 30% female
directors, which was their goal.

- We share an awareness of their issues such as
improving diversity with their board of directors andincreasing the ratio of females in management andbelow.

- Since they have reached over 30% female directors,
our policy is to encourage them to increase theratio of females in management and to eliminate
gender imbalance among departments to improvediversity.

Perspective of Engagement Specialist

Opinion from SMTAM

Company Response

Corporate Action

Evaluation by SMTAM / Future Policy

As a major wholesaler of agricultural products in theUS, they need to improve monitoring and enforcement
related to soybean production and its supply chain,
which is considered a major cause of deforestation in
Brazil. The impact of deforestation on climate change
and water resources interferes with the sustainablegrowth of this company.

In addition to deforestation with tropical rainforests, it is necessary to
prevent destruction of vegetation in the savannah grasslands, including
the Cerrado region, which is a major production area for soybeans. We
have sent letters to this company requesting them to establish
complete traceability of their supply chain, including direct and indirect
suppliers, and clearly state when this will be achieved, disclose theirpolicy for handling violations, and set goals related to soybean
p r o c u r e m e n t n o t c ul t i v a t e d i n f a r m i n g a r e a s m a d e t h r o u g h
deforestation. While it is good that they have made a commitment
regarding supply chain monitoring and disclosed their goal to eliminate
deforestation by 2030, there are news reports that raise suspicions on
their initiatives.
It seems that top management should also explain the economic
rationale related to risks and business opportunities to strengthen
confidence in their initiatives for achieving goals.

Regarding soybeans in South America, we expect to havecomplete traceability of the supply chain in 2022. Although
we expect to see a positive response from clients based on
our commitment to eliminate deforestation, it is not clear
how it will affect our business. We are committed toachieving sustainability goals, and recognize that it is thefoundation for our mid- to long-term business strategy. We
are sure that strengthening sustainability through the value
chain, including the implementation of regenerative
agriculture and the production of sustainable aviation fuel, isa source for our competitiveness.

In April 2022, they announced that they
move up their target year for achieving
zero deforestation from 2030 to 2025. In
their sustainability report in May of 2022,
they also stated that they achieved theirgoal of 100% traceability for direct andindirect suppliers.

- They announced the establishment of a supply
chain traceability system, but their policy forhandling non-compliant suppliers and the timelineto accomplish it remain unclear, so there arequestions about the effectiveness of their goal ofachieving zero deforestation by 2025.
- In addition to confirming the implementation status,
we will continue engaging in dialogue to help them
step up their initiatives for improving transparency
and sustainable farming. Our policy is to utilize
collaborative engagement through the US NGO
Ceres and the policy engagement initiative IPDD.

- Prevention of deforestation

AGL Energy

now, and have determined that they are in a phase
where progress must be confirmed.

Perspective of Engagement Specialist- Enhancementof supply chain management

CAS E 9change response.

- It seems they will promote specific initiatives fromWe have been requesting this company to improve
gender diversity since 2019, and determined that they
still need to increase the ratio of females on the boardof directors. I believe that dialogue using knowledge
acquired from initiative activities such as the 30％Club*1
and examples of other companies in Europe will beeffective.

- Diversity

CAS E 8the internet, and in person since 2019 because they
are one of our target 100 companies on climate

Perspective of Engagement Specialist

Opinion from SMTAM

Company Response

Corporate Action

Evaluation by SMTAM / Future Policy

While they will continue coal power generation businessin Australia, they are enhancing initiatives for addressing
climate change issues through organizational changes
such as by dividing their po wer generation anddistribution businesses. Based on their existing plan, they
will not be able to reach the Paris Agreement scenario(1.5ºC), so they need to formulate and disclose aneffective plan for addressing climate change issues, andestablish climate change governance.

It is estimated that their coal-fired thermal power generationaccounts for 8% of greenhouse gas emissions in Australia, so theyneed to accelerate reduction of greenhouse gas emissions in orderto achieve NDC*2 in Australia. Their transition plan was announced,
but it remains insufficient, so we believe they should formulate aneffective transition plan as quickly as possible for accelerating
withdrawal from coal-fired thermal power generation and invest in
renewable energy.

Our policy is to withdraw from coal-fired thermal power
generation from a mid- to long-term perspective. Then, we
need to make decisions based on economic rationale andmarket conditions. We are also considering selling ourcoal-fired thermal power generation business when splitting
the company. This issue involves business reorganization
including investment in renewable energy, so a specifictransition plan needs to be made after in-house restructuring
is completed.

A transition plan for climate change wasproposed and approved by the company
at their general meeting of shareholders
in November 2022. At the same time,they announced that the time for closing
operation of a coal-fired thermal power
generation plant in Victoria, which had
long been a concern, will be moved
forward 10 years.

Our policy is to confirm the progress of just transition
including formulation and implementation of an
employment strategy due to announcement of theirearly transition plan such as withdrawal fromcoal-fired thermal power generation.

*1. Initiative based in the UK that promotes diversity of gender, race, etc.
*2. Abbreviation for Nationally Determined Contribution. Under the Paris Agreement, there are greenhouse gas reduction targets for each country.

33

S M T AMA M STEWARDSHIP REPORT 2023/2024

34

Message from the CEO

SMTAM Stewardship Activities

Engagement

Exercise of Voting Rights

ESG Integration

Disclosure of Climate-related Financial Information under TCFD

Reference

Engagement Example Cases - Global

CAS E 10
Kuala Lumpur
Kepong (KLK)

Perspective of Engagement Specialist

Opinion from SMTAM

Company Response

Corporate Action

Evaluation by SMTAM / Future Policy

FSDA*3 collaborative engagement as a lead manager isongoing. I think more effort should be made toeliminate deforestation activities through agricultural
products in the investment portfolio by 2025.

To achieve sustainable lives and food supplies globally, it is essential
to have a thriving agricultural supply chain without deforestation.
It seems they need to disclose information as a palm oil producer
and RSPO * 4 member regarding their activities for preventing
deforestation and strengthening supply chain traceability.

Responding to EUDR *5 is an urgent issue. The EU enacted
laws mandating that companies confirm that products suchas palm oil, beef, soybeans, coffee, cocoa, lumber, andnatural rubber are not being produced on farmland
developed through deforestation after December 2020, so
we quickly need to establish a system for this. Responding tothis law is similar to the response to MSPO (Malaysian
Sustainable Palm Oil), so there is no way to avoid increases
in management costs and production costs.

They set a policy for NDPE*6 and alreadyachieved 100% traceability for owned
palm oil plantations. There are still areas
they need to improve in regard to
procurement from small holders anddealers, and they are planning to resolve
such issues by providing education tosmall holders and installing GPS.

We will monitor their response to the EUDR, and(Malaysia / Palm oil plantation)- Forest conservation- Enhancement of supply chain management

CAS E 11
Steel Dynamics(US / Steel industry)- Climate change issues- Information disclosure

CAS E 12
Activision Blizzard(US / Game software development)- Diversity- Human rights- Information disclosure

Perspective of Engagement Specialist

Opinion from SMTAM

Company Response

Corporate Action

Evaluation by SMTAM / Future Policy

Dialogue has been ongoing since 2020. They are anelectric furnace steel manufacturer, so the intensity of
their greenhouse gas emissions is considerably lower
than that of competitive blast furnace manufacturers,
but I think they should be taking the lead when it
comes to energy transition in the industry from along-term perspective by bringing forward their
reduction activities.
There is also room for improvement regarding
information disclosure. I want them to clarify theirenvironmental strategy and strengthen communication
with stakeholders.

Carbon intensity is already lower than competitors, so we wantthem to set absolute targets for reducing greenhouse gas
emissions and to improve information disclosure by participating in
CDP*7 surveys.
Although blast furnace manufacturers had advantages in the past for
use with automobiles due to the processing method, electric
furnaces are becoming more popular, so we want to confirm thepossibility of expanding their share in the future.

We are making efforts to promote in-house initiatives toimprove information disclosure based on feedback frominvestors. It is possible to further reduce emissions based on
intensity by increasing use of renewable electricity. Horizontal
development of recycling to copper and aluminum is also
effective for this transition.
Although blast furnaces still have advantages when it comesto automobile body surfaces, for other components, electric
furnaces have advantages due to low carbon and lightweight.
We are also making efforts to implement biocarbon
technologies that can contribute to further low carbonization,and if realized, it will be possible to achieve better functions
with carbon and weight compared to aluminum.

In July 2021, they disclosed their goal forachieving net zero greenhouse gas
emissions by 2050, as well as a 50%
reduction by 2030 and a 20% reduction
by 2025.
In 2022, they participated in the CDP
survey. They also announced theirinvestment in the horizontal developmentof an aluminum recycling business using
renewable electricity.

- Although the US is not a major emitter sinceelectric furnace manufacturers are the mainstay, we
will continue to have engagement by approaching
the global steel manufacturing sector as a whole.

- There are remaining issues such as the launch of alow-carbon steel and aluminum business, anddeepening sustainability business strategies byimproving information disclosure on clarification of
the impact.

Perspective of Engagement Specialist

Opinion from SMTAM

Company Response

Corporate Action

Evaluation by SMTAM / Future Policy

The company has been identified as lagging behind interms of information disclosure according to our
in-house ESG screening, and dialogue has beenongoing since 2020.
They issued their first ESG report in June 2021, which
improved information disclosure, and later, problems
with their in-house work environment were discovered
including sexual harassment, which developed into a
lawsuit. Currently, the main theme for dialogue isdeepened to improvement of overall human capitalmanagement and management transparency.

We began dialogue with this company on improving ESG
information disclosure, and there was some improvement such as
disclosure of ESG reports. As part of this, DE&I (diversity, equity, andinclusion) was set as a priority issue, but KPIs have not been
sufficiently disclosed. We want them to consider publishing theiremployee composition for regulatory submission (EEO-1), which
other major companies in the US are doing.
There have been complaints of sexual harassment and discriminationin the workplace, so it seems important to improve transparency byeffectively operating and disclosing the grievance mechanism.

There is room for improving our information disclosure andtransparency. As a first step, we published an ESG report.
Our policy is to have ongoing dialogue with stakeholders andto share progress on important KPIs.
Although we have already made disclosure about the gender
pay gap, we want to improve this. Our goal is to raise thepercentage of females and minorities in each hierarchy of thecompany s organization by 50% from the current level within
the next five years.
There are few American companies that disclose grievancemechanism, so we are concerned this could be
misunderstood.

They improved information disclosure
including on employee composition (forEEO-1), pay gap, and promotion/turnoverrate disparity (gender/minority) by 2022.
In 2023, they published a transparency
report that included detailed informationof the grievance process.

- While dealing with the loss of human resources
caused by the sexual harassment lawsuit,
information disclosure on human capital isimproving rapidly.
- Regarding engagement with shareholders, a person
was hired to be in charge of ESG, which establisheda bidirectional communication process.
- We will confirm the effect of initiatives for improving
diversity and the overall culture in the workplace bymonitoring these trends.

Perspective of Engagement Specialist

Opinion from SMTAM

Company Response

Corporate Action

Evaluation by SMTAM / Future Policy

Investment in infrastructure is expected to increase in
India, so a high demand for cement is expected. On theother hand, it is not possible to avoid high greenhousegas emissions with the current cement manufacturing
process when handling processing for raw materials, so
drastic measures are needed.
In addition to the approach to individual companies, anapproach through global industry activities seems
necessary.

Current cement production causes large amounts of greenhouse gas
emissions during the manufacturing process. It seems necessary toquickly address this based on a realistic transition plan.
In particular, it seems necessary to (1) implement measures for low
carbonization in the production process, and to (2) stimulate
demand for low-carbon cement. Additionally, we gave our opinion
that it would be good to (3) disclose specific measures forconfirming the effectiveness of capital policy support, etc.

- Information disclosure

We recognize and understand that there is an urgent need topromote decarbonization measures for cement
manufacturing. We have a clear roadmap for ourdecarbonization measures, and plan to acquire SBTi * 8
certification.
We have already responded to information disclosure on
climate change according to the TCFD framework, andannounced specific measures for achieving 100% renewableenergy in September 2021.
We also want you to follow-up on our plan to enhance
disclosure of our progress status.

In their sustainability report for June
2023, their plan based on SBTi
certification and information based on
the TCFD framework were disclosed.
Regarding disclosure of their progressstatus, it was confirmed that the
renewable energy rate in 2022 was 28%,
which is higher than the target for 2023
of 19%. Sales of low-carbon products
reached 70%, so it was confirmed that
their product mix transition has
progressed more than expected.

- We have conducted effective engagement activities
in collaboration with local asset managers who
participate in CA100+*9.
- We also recommended that they formulate aneffective transition plan by collaborating with GCCA
(Global Cement and Concrete Association), which
they are a member of, along with best practices in
the cement industry.
- It is necessary to confirm progress details with thetransition plan, and we will continue to encourage
disclosure through dialogue.

*3. Abbreviation for Financial Sector Deforestation Action. This is an initiative by the financial sector requesting the elimination of deforestation caused by production of agricultural commodities.
*4. Abbreviation for Roundtable on Sustainable Palm Oil. This is a non-profit organization established in 2004 for promoting the production and use of sustainable palm oil.
*5. Abbreviation for European Deforestation Regulation. These are regulations on deforestation agreed to by the EU in December 2022. These regulations ban the import of agricultural products connected with deforestation to the EU.
*6. Promotes procurement in harmony with the principles of No Deforestation, No Peat, No Exploitation.

*7. Abbreviation for Carbon Disclosure Project. This NGO, which was established in 2000, initially evaluates and discloses information on the strategies and efforts for climate change andgreenhouse gas emission reductions made by companies and local governments. They now also cover environmental issues such as forest and water security in addition to carbon.
*8. Abbreviation for Science Based Targets initiative. This is an initiative requesting companies to set reduction targets in harmony with scientific scenarios for achieving the targets of the Paris Agreement.
*9. Abbreviation for Climate Action100+. Initiative requesting companies that have high GHG emissions for disclosing information based on the TCFD framework.

CAS E 13UltraTech Cement(India / Cement manufacturing)- Addressing climate change

35

continue to have collaborative engagement throughFSDA.

S M T AMA M STEWARDSHIP REPORT 2023/2024

36

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Top-Down Engagement

Top-Down Engagement

Activity Results for 2022 (July 2022-June 2023)

In 2019, an ESG investment policy was established at management meetings and 12 ESG materialities wereidentified. We are promoting top-down engagement activities in harmony with these.
After selecting around 100 target companies from among investee companies via top-down analysis according to each
ESG materiality, engagement activities will be promoted by setting goals (long-term goals) linked to each ESG materiality
and setting targets (interim targets) by backcasting based on the ESG issues and ESG management level of each

Materiality Composition for Engagement

Gcompany. Effective goals and targets are set, and effective engagement is performed based on our deep understanding

actively participating in from our three offices in Japan, the US, and the UK.
The progress status of engagement is managed in four phases according to the ESG materiality targets of each company. Aftertargets are met, monitoring is done for later processes such as implementation of measures and resolution of issues.

Stability & JusticeCorporate ESG issues

Target (Medium term)

Established in accordancewith corporate ESG management level

Goal (Long term)

Behavior
SocialOpportunities

6%

4%

Engagement progress is managed in four stages according to the ESG topic,
and further measures are then implemented and the resolution of issues is monitored.
- Identifying ESG priority issues with investee companies and setting specific topics (issues)- Setting targets (interim targets) by backcasting from topic goals(3) Issue sharing(with person in charge at the company)

23%

11%

S

9%

16%

Human Capital

19%

11%

(5) Implementation of measures- Corporate policy statements (corporate actions) are confirmed- Progress is monitored

14%

E

Average progress
Period beginning July 2022

2.9 step
70%
60%
50%
40%
30%
20%
10%
0%

End of June 2023

3.9 step*

Progress in engagement

actively engaged in dialogue with management
groups, which increased the Step 4 ratio (Issue
sharing with management groups). During
FY2023, we will continue engaging in dialogue
with management groups so that all can moveto the next step, and in particular, we will

S

G

Average progress
Period beginning July 2022

2.6 step

End of June 2023

4.3 step*

Progress in engagement(Composition ratio) 70%

60%
50%
40%
30%
20%
10%
step1

step2

step3

step4

step5

step6

End of June 2023

Period beginning July 2022

0%

step1

step2

step3

step4

Period beginning July 2022

step5

step6

End of June 2023

2.4 step

End of June 2023

4.0 step*

Progress in engagement(Composition ratio) 60%

40%- If the progress is insufficient, consideration is given when exercising voting rights

30%* It is not possible to simply compare the materiality composition
between the end of June 2022 and the end of June 2023, or tosimply compare steps at the end of June 2022 and steps at the20%

beginning of the July 2022 period.
- Brands/topics are replaced as part of the annual plan for the

10%

37

E

were able to implement measures, so for S, we

Average progress- Target achievements are confirmed and shared with the company

3. Improving corporate sustainability and corporate value for investee companies

Pollution& Waste(Resolution of issues). Regarding E, only somepromote engagement activities while keeping50%(6) Issue resolution

5%(Implementation of measures) and Step 6

Step Progress Status (Compared to Previous Year)- While sharing issues with the person in charge at the company,
engagement is escalated to the management for implementing measures and resolving issues- Internal examination is promoted for implementing measures and resolving issues

0%
7%

4%

NaturalCapitalan awareness of Steps 5 and 6.

- Issues are presented during interviews with companies
and engagements are held continuously for sharing issues- Issues are shared with the management group and best practices are introduced

companies during this fiscal year, and in

Environmental
Opportunities

Human Rights& Community

Period beginning July 2022

(4) Issue sharing(with management group)

Progress was also observed at a number ofmany cases, they progressed to Step 5

OutsideJuly 2022 - June 2023
Insidesocial opportunities for 4%. We activel yengaged in dialogue not only about risks, butalso about opportunities.

27%

July 2021 - June 2022

(Composition ratio) 80%(2) Issue presentation

Climate Change

13%
1%
3%

3%

human rights and community for 11%, and

2%

4% 5%
1%

Backcasting

2. Stage management and monitoring(1) Issue setting

8%
5%

Security& Responsibility

1. Selection of target companies based on ESG topics and setting goals and targets

opportunities for 14%, human capital for 16%,

Governance Reforms

Structureand knowledge about companies and industry trends that has been accumulated through numerous engagements up
until now, and knowledge on global trends related ESG gained through Japanese and global initiatives that we are

When looking at each topic, climate change
accounted for 23%, environment-related

0%

step1

step2

step3

step4

Period beginning July 2022

step5

step6

End of June 2023

period beginning July 2022.
- Topics (Steps 5, 6) where targets were achieved by the end ofJune 2022 were excluded.

S M T AMA M STEWARDSHIP REPORT 2023/2024

38

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Top-Down Engagement

Example of the process for achieving goals related to climate change issues (Case of company A in the manufacturing sector)
To achieve each of ESG materiality goals (long-term goals), it is necessary to set materiality targets (interim targets) not just forE, but also to formulate targets that combine the S and G aspects of materiality, so that each can be achieved in a
multi-layered manner. For example, carbon neutrality by 2050 has been set as a goal regarding climate change issues, andengagement is performed by setting targets according to the situation of each company for achieving this. We will conduct
effective engagement by establishing issues as detailed activity items for each target. In the following case, we set
appropriateness of set goals as the target.

1. Target setting

2. Relationship between goals and targets

For company engagement, ESG materialities are set as specific targets (interim targets).For each of these targets, specific issues are

For achieving ESG materiality goals, targets with the same or multiple materiality issues must be cleared

broken down into activity items

Goal
Consideration for the exercise of voting rights (Minimum standard)Presentation of initiatives for improving corporate value (Best practices)
Realizing carbon neutrality
by 2050

Target this timeIssue A / Issue B

Effectivenessof achieving goals
Setting KPIs and goals,
and appropriatenessImprovement of information
disclosure according to TCFD
Sustainability
strategy formulation

G

E

E

Spreading in the organization
Personalization

Next target

E

Consistency withthe management strategy
Reviewof business portfolio

Reflecting KPIs
to remunerationfor executives

G

G

G

S

Human capital

Promotion of corporate activities

Promotion of corporate activities
Management vision formulation

Governance reforms

Reflecting to the medium-term
Scenario analysis

Climate change issues

management plan through backcasting

Consideration of risks
and opportunities (financial impact)

Climate change issues
Specific measures

Climate change issues

Investment plan
Fund procurement

Promotion of corporate activities

Engagement example with climate change issues for Company A in the manufacturing sector
April 2021 (Step 1)

April 2021 (Steps 2, 3, 4)

Since 2030 GHG reduction targets (Scope 1+2) disclosed in March of
the same year were poor compared to NDC*, raising these target
values has been set as an issue by setting the appropriateness of set
goals as a target

Through dialog with persons in charge and management groups, we pointed out theneed to raise target values and review the business portfolio*NDC: Nationally Determined Contribution

Even though renewable energy was doubled, the necessary amount was not reached, so
scenarios are being analyzed. There are potential business opportunities. Introduction ofinternal carbon pricing and financial resilience tests will also be considered

SMTAM

Issue A

December 2021 (Step 1)
SMTAM

Issue B

Since GHG reduction targets disclosed in November of the same year
did not include the equity method subsidiary, reflecting to target values
or presenting Scope 3 targets was set as an issue

During dialogue with persons in charge, the need to set goals that
include the equity method subsidiary was pointed out

Company Response

Although not included in set goals, it is being managed for governance

39

SMTAM

Company Action

Company Response

SMTAM s Policy

December 2022 (Step 4)

August 2022 (Steps 2, 3)
SMTAM

November 2021 (Step 5)
Announcement of higher 2030 interim reduction targets

Since making high-emission business into an equity method subsidiary
impacted additional GHG reduction amounts, the actual status of thecompany is not properly reflected, so it was reset as Issue B

February 2023 (Step 5)

SMTAM

During dialogue with external directors, the need to set goals that include the equity
method subsidiary was pointed out

Company Response

The board of directors has had serious discussions on this business. For bothfinancial and non-financial matters, involvement in formulating plans, managing goals,
providing oversight, and promoting initiatives will be undertaken

Company Action

Announcement of Scope 3 targets that reflect the equity method subsidiary
Next, effectiveness of achieving goals is set as a target

S M T AMA M STEWARDSHIP REPORT 2023/2024

40

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Roundtable Discussion
by Engagement Specialists in Japan, US, and UK

Global Trends Related to ESG, and SMTAM s Philosophy and Activity Status
̶Roundtable Discussion by SMTAM Engagement Specialists in Japan, the US, and UK̶
SMTAM has established stewardship activities oﬃces in the UK and US in addition to Japan for gathering knowledge on
global trends related to ESG issues and regulations. Our aim is to provide meaningful engagement activities that take into
account the unique circumstances and diﬃculties in each region including Japan, the US, Europe, Asia, and Oceania.
This time, six individuals who are taking the lead with our engagement eﬀorts in Japan, the US, and Europe gathered to
exchange opinions about the prominent ESG topics, drawing from their daily activities and the local circumstances of eachregion, and to provide insights to other oﬃces. This section includes some information on global trends related to ESG and
our engagement activities based on their roundtable discussion.

From the left: Takeshi Wada, Masaki Soma, Hisaya Kambayashi, Seiji Kawazoe, Satoshi Takei (top), Masaru Okubo (bottom)

41

Global trends related to ESG

and governments and international organizations have high(sources for absorbing greenhouse gases). In addition, I

it becomes standardized, I believe the expectations of

Kambayashi: Here, we have gathered together individuals

expectations on the progress of various initiatives.

believe that information disclosure on natural capital (TNFD)

companies and investors on climate-related information willin charge of engagement activities in Japan, the US, and

The Russia-Ukraine conflict has also had a negative impactthat started in 2023, which is a framework similar togradually converge. What is the situation like in Europe, Mr.

UK. I would like you to share your frank opinions on youron the climate change debate. In Europe, natural gas supply

information disclosure on climate change (TCFD), will

Takei?

unique circumstances and give suggestions to other offices

from Russia was stopped, which increased energy andaccelerate the resolving of issues in this field.

Takei: ESG disclosure by European companies is improving

based on your daily activities. First, to get things started,

electricity prices, so coal-fire power generation and nuclear

Since a global framework on sustainability has been

every year, and with climate change in particular, many

I d like to ask Mr. Kawazoe, who is the General Manager of

power generation, which had been suspended, needed to beorganized, it is necessary for companies to strengthen value

companies have already come to understand the status

Global Initiatives, to explain some current global trends

restarted. This is a global trend. There is a recognition thatchain management as part of corporate governance.

under Scope 1, 2, and 3 and have set targets. So, it has

related to ESG.

energy transition plans have not yet been achieved from a

Responding to social issues such as properly responding to

moved to the phase where they are working to clarify their

Kawazoe: Floods, heat waves, and droughts are clearly

security perspective and that it is difficult to quickly withdraw

issues with indigenous peoples will require a new

greenhouse gas reduction plans from a medium- to long-term

occurring more often as a result of climate change, and it

from fossil fuels, which has led to the search for more

perspective, and will be a point of contention in the future

perspective and are discussing specific strategies. On theseems to me that there is a growing sense of crisis related topractical solutions. Examples of this search include

when resolving environmental issues like climate change andother hand, one bottleneck for advancing environmental

climate change worldwide. As for reducing the use of fossil

investment in CCS (carbon dioxide capture and storage) andnatural capital.

action that we are hearing from different companies isfuels, deeper discussions have been held at international

coal-ammonia co-firing technology, which is being promoted

conferences such as the UN Climate Change Conference ofin Japan. Without a stable transition plan, it will not be

Actions on Climate Change Issues in Each Region

established for encouraging better accuracy with data for thethe Parties and G7 Summits, and developed countries are

possible to withdraw from fossil fuels, so I believe that such

Kambayashi: First, let s talk about trends with actions towhole value chain so that progress toward set targets can beworking to achieve the 1.5ºC scenario

obtaining accurate data. We are waiting for rules to betrends and discussions will continue.

address climate change issues, which is clearly the mostdisclosed. The trend with investors is to escalate proposals

cutting greenhouse gas emissions in half by 2030.

There was a major movement with the global framework

important theme that exists in all regions. Mr. Okubo, couldby shareholders and divestment, but at this moment, there

At the same time, there is a huge gap in the responses byrelated to natural capital. Although establishment wasyou tell us about the situation in the US?

are limits to the improvements that can be made by

developed and emerging countries. Emerging countries aredelayed due to the pandemic, at the 15th Conference of the

Okubo: In the US, climate change issues cause significant

companies regarding accuracy, and it seems dialogue on thisworried that their economic development may be disrupted

Parties to the Convention on Biological Diversity (COP15)

political divisions, and companies are promoting activities

point has become rigid.

by climate change measures, which was brought up in Egypt

held in Montreal in December 2022, many countries agreed

aimed at reducing risks and gaining business opportunities

Wada: In Asia, the focus is not just on responding toin 2022 at COP27 (the 27th Conference of the Parties to theto set 2050 as a goal for nature recovery. The new global

through energy transition. The Inflation Reduction Act thatcompanies with high greenhouse gas emissions, but also on

United Nations Framework Convention on Climate Change).

target called theKunming-Montreal Biodiversity

was enacted in 2022 includes a huge budget set aside forissues with natural capital as the climate change theme. In

At the previous conference, everyone was somehow able toFramework, which aims to halt the loss of natural capital bycreating jobs and promoting industry during the transition

addition to palm oil*4, we will also plan to address

reach an agreement, but there are heated negotiations on2030, was adopted, and additionally, goals for recovering it

period, and promotes investment in development withtraceability with the natural rubber supply chain from thiswhether to continue a global cooperative system forby 2050 were put forward. This is the biggest movement

mobility, hydrogen, and CCUS (carbon capture, utilization,

fiscal year.

providing funds and technology to emerging countries forsince the conclusion of the Nagoya Protocol in 2010, andand storage). It has become a realistic response. As forfighting climate change. The provision of funds for climateshows the sense of crisis related to the loss of natural

information disclosure on climate change, we are waiting for

Issues with phasing out coal-fired thermal powerchange measures is expected to be a major issue at COP28

capital. Regarding climate change issues, greater attention is

the final rules set by the US Securities and Exchange

Kambayashi: Regarding energy transition, which is a common

held in Dubai in November 2023. The reality is that the way

being given to the relationship with natural capital, so

Commission (SEC). In particular, there is not enough accuracy

issue when responding to climate change, there areprivate funds are used for implementing climate change

agendas at the UN Climate Change Conference of the Parties

with the data in Scope 3 *2 , so companies hesitate to set

problems with phasing out of coal-fired thermal power

measures has become a serious issue with financial markets,

have included measures for preventing loss of carbon sinks

goals. Recently, the ISSB

generation (Note: Gradual termination), especially in Asia

*1

at the very least by*3

announced its final proposal, so as

S M T AAM
M STEWARDSHIP REPORT 2023/2024

42

Message from the CEO

SMTAM Stewardship Activities

Engagement

Exercise of Voting Rights

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Roundtable Discussion
by Engagement Specialists in Japan, US, and UK

Seiji Kawazoe
Global Initiative Fellow
ESG Research and Development Oﬃce
Stewardship Development Department (Tokyo)
Has worked as a foreign equity analyst at local subsidiaries in New York,
London, and Luxembourg for a total of 13 years since 1993. Has been
involved in ESG-related business since 2006. Current position since 2022.

necessary to present implementation milestones and fundingon this movement to find practical solutions for energy

Okubo: Major banks in the US collaborate with the NZBA

plans.

transition in each region.

and promote this including decarbonization targets inOkubo: The US and Canada are using the competitiveness of

Okubo: Some people believe that these will just end up

investment and loan portfolios. At first, it started with thetheir own natural gas production as leverage to promote

being ways to extend the lifespan of coal-fired thermal

three high-emission sectors, and then targets gradually

medium-term decarbonization via a major transition frompower plants.

expanded. However, in the US as well, most targets arecoal to gas. At the same time, while investment in renewable

Kambayashi: If these are really not just extension measures,

intensity-centered according to sector (emissions per unit

energy is being promoted, there are serious concerns about

a detailed transition plan needs to be presented to avoid

sales), so the problem is still that overall reduction control

supply stability. There are also expectations with the export

such concerns.

cannot be seen as an absolute value. Banks claim thatof LNG, so the current trend seems to be to focus on

Wada: Exactly. The purpose of the GFANZ*6 Japan Country

simple calculations of total emissions without complete

improving related infrastructure, hydrogen co-firing, andChapter is for financial institutions to demonstrate collective

individual data will damage the reliability of the disclosed

CCUS development.

leadership and innovation that will contribute toward theinformation. However, some feel strongly that

Kambayashi: So it seems that CCS where new holes areworld s net zero challenge, and they are planning to give aaccountability is needed such as by showing progress

drilled and filled with CO₂, which is being done in Japan, andclear message leading up to COP28 and the PRI Tokyo

status because of commitment to emission reductions

CCS that utilizes the petroleum oil and gas extraction layers

convention. I am expecting these to serve as a reference thatfrom portfolios, so we recognize that managing

at existing drilling sites in the US and elsewhere arewill help companies create transition plans. The GFANZ

calculations using absolute values requires an approachcompletely different in regard to their contents andAsia-Pacific Network (APAC) engages in consultations for thefrom diverse perspectives including methodology andprofitability.

phasing out of coal-fired thermal power generation, andphase theory.

Soma: In Japan, there are many restrictions and conditions

SMTAM is also providing feedback.

related to CCS, so it cannot be used by all thermal power

Kawazoe: Biomass usage has limits, so ultimately, it isstations. We are asking electric power companies to present

necessary to continue promoting development of renewablerealistic transition plans that include the feasibility ofenergy, like offshore wind power generation, while keeping

resuming use of nuclear power plants.

an eye on the restart status of nuclear power plants. I believe

Kawazoe: We should look cautiously at the related trend ofthat, for the time being, a realistic transition involves

focusing on biomass power generation as a measure forsupplementing any insufficiencies with ammonia co-firing andsupplementing nuclear power generation. There are some

CCS, which serve as regulators in what are consideredserious questions being asked globally about large-scalezero-emission thermal power generation methods.

biomass power generation. This is because biomass power

43

generation was never intended for large-capacity power

Decarbonization strategies of major financial institutions

generation. It was intended as a way to generate power by

Okubo: I want to discuss decarbonization planning in theand Japan. Coal-fired thermal power generation is still theconverting waste materials and unnecessary wood into

investment and loan portfolios of financial institutions.

main power source in Asian countries where economicpellets and then burning them. For example, in the UK, a

Financial institutions play an important role when it comes togrowth is expected in the future, and there are a number oflarge amount of pellets was imported for use as biomassenergy transition, and initiatives are evolving through thefacilities that recently began operating, so if these are

power generation. The concern that such pellets are madeestablishment of decarbonization targets in portfolios.

forcefully closed, there is concern that shareholder value mayfrom timber spread and it became an issue. Later, the value

Therefore, it seems we are in a phase where information

be affected as a result of huge losses. New ones are stillof UK wood pellet imports fell sharply, but import has

disclosure is needed in order to confirm progress as a wholebeing built, even in Japan.

increased in Japan recently as investment in biomass powercompany.

Soma: Although this was focused on in the AIGCC*5 program,generation has increased. Although biomass power

Soma: Megabanks in Japan are setting goals using aelectric power companies in Japan are required to have ageneration is eco-friendly, it is meaningless if it requires

sector-specific approach in line with PCAF *7 and NZBA *8

specific action plan for phasing out coal. However, generally,

cutting down forests. As for whether it can really be

guidelines, but this creates the issue that standards forJapanese companies have a tendency to determine

considered carbon neutral, to avoid the problem that existed

overall emission reduction targets are not clear.

long-term targets from the bottom-up as an extension of thein the UK, Japan needs to take steps such as improving theKambayashi: Major financial institutions in Japan have been

current situation, so it is frustrating to see the huge gap thatsustainability and traceability of the procured wood pellets

criticized for having large loan balances with existing fossil

exists with global mid- to long-term goals, deadlines, andas fuel.

fuel industries. Regarding this, since major banks in eachplans. Ammonia co-firing/single-firing and use of CCS at

Wada: In Asia, there have been discussions on the necessity

region are promoting disclosure, it seems there is a need forexisting facilities should not be rejected as a practicalof coal-fired thermal power using so-called zero-emission

deeper analysis such as global comparisons of the contentssolution at this time, but to incorporate these, I feel it isthermal power as a realistic transition, and we are focusingof coal policies.

Masaki Soma
Senior Stewardship Oﬃcer
Head of ESG Research and Development Oﬃce
Stewardship Development Department (Tokyo)
Has worked with Japanese equity investment since 2001. Joined SMTAM in2005 after working at securities companies in Japan. Current position since
2020.

S M T AAM
M STEWARDSHIP REPORT 2023/2024

44

Message from the CEO

SMTAM Stewardship Activities

Engagement

Exercise of Voting Rights

ESG Integration

Disclosure of Climate-related Financial Information under TCFD

ReferenceRoundtable Discussion
by Engagement Specialists in Japan, US, and UK

portfolios using frameworks such as GFANZ and PCAF, so itplans have not yet been developed, and there are many

Soma: If the price does not even out, production bases andseems that overall disclosure ends up being in the samecases where targets for Scopes 1, 2, and 3 are disclosed, butinvestee companies may move from regions and countries

framework despite differences in progress according todetailed measures and investment plans do not exist. Sincewith high carbon prices to those with lower prices, which

regional characteristics. How are initiatives progressing withthe decarbonization scenarios that are referenced by each

could result in carbon leakage where total carbon emissionsindividual European banks?

company for disclosure (IEA: International Energy Agency,

actually increase. I believe the introduction of a carbon

Takei: Currently, in Europe as well, few disclose

WBCSD: World Business Council for Sustainableborder tax, which is now being considered in Europe anddecarbonization targets for their overall investment and loan

Development, etc.) are not unified, many banks believe it iselsewhere, will prevent this from happening. Japan also

portfolio. At the same time, coverage of sectors with highdifficult to improve disclosure, and they hesitate to makeneeds to gradually introduce this to reduce the price gap

greenhouse gas emissions has progressed according to

improvements or enhancements to reduction plans. Manythat exists between Japan and other countries, and use

NZBA guidelines. For example, disclosure sectors increased

similar comments have been made by non-life insurance andthese funds to develop low-carbon, decarbonized, andgreatly from 5 to 10. Many are saying that they will disclose

reinsurance companies.

energy-saving technologies.

the majority of emissions for their overall portfolio during

Wada: In Asia, we are starting to see a positive stance taken

Kambayashi: The reality is that such discussions have not2023, and will disclose the remaining sectors in 2024. By

by financial institutions in Singapore and Malaysia. DBS Bank

progressed, which shows that the government, companies,

country, the Nordic nations, France, and the UK are

in Singapore is playing a leading role in preparing theand citizens in Japan lack a proper sense of crisis regarding

advancing, while major banks in Spain and Italy are following

consultation paper on transition finance in Asia for GFANZ.

global warming, a sense of ownership, and determination toclose behind regarding disclosure. On the other hand,

In addition, the bank has disclosed its decarbonization

make changes. What are the latest developments in Europe

Germany and Switzerland have many high-emission sectors,

targets for nine major industries and has been proactive inand the US?

so they seem to be behind.

addressing transition finance with conditions, and its

Takei: In Europe, they have determined to implement a

Soma: Coverage by megabanks in Japan increased to aroundinitiatives have been highly evaluated. At the same time, thecarbon border tax starting in 2026, so companies in the

70% as target sectors expanded in FY2023, so the difference

stance of financial institutions in China and India is to follow

with advancement in Europe is expected to shrink. However,national policies, so their response is slow.

I also want them to present emission reduction targets for

Okubo: The Monetary Authority of Singapore appeared attheir overall portfolios.

the ISSB Symposium held in Montreal in February 2023, andTakei: Speaking of disclosures by absolute values or byrequested that initiatives be promoted based on a sense of

intensity, banks in Europe use intensity for managing theircrisis related to future local economies.

investment and loan portfolios for each sector. On the other

Kambayashi: I have spoken with the GIC, which is ahand, some companies in the energy sector are not justgovernment-affiliated investment company in Singapore, anddisclosing intensity but are also disclosing absolute levels inthey mentioned that they are committed to promoting action

response to investors.

on climate change in the ASEAN region, and are proactively

Soma: In Japan, setting interim targets has also progressed in

Kambayashi: In Japan, at general meetings of shareholders inpromoting impact investment for selected individual projects.

each sector, but I want to have a more clear plan for

June 2023, three megabanks were requested throughIt seems that transition is being promoted in Singapore

achieving 2030 targets. It also seems necessary to confirm

shareholder proposals to disclose their decarbonization

through a unified approach by the Government, theconsistency with the national carbon budget and NDC .

plans that align with the Paris Agreement. What about inexchange, sovereign funds, and financial institutions.

Kambayashi: Regarding expansion of target sectors for

Europe and the US?

disclosure, Japanese megabanks claim that they have the

Okubo: In the US too, there have been shareholder

Carbon pricing and carbon border tax issues

highest coverage rate in the world, but is that really the

proposals to major banks on target disclosure. However,Soma: To encourage companies and individuals to change

case?

some hesitate to disclose details about their decarbonization

their behavior, full-scale carbon pricing * 1 0 needs to be

Okubo: Some megabanks have affiliated local banks in theplan because of the possibility that the information will be

implemented. However, there is a strong tendency in JapanUS, and they also give details in the US.

reviewed and amended in the future due to accuracy. They

to resist extreme changes to systems, so it is difficult to

Soma: It s true that some megabanks state that they have a

are concerned about the risk of potential lawsuits andimplement a bold system design.

high disclosure percentage from high-emission sectors, but

reputational risks, which is understandable. We are trying to

Kambayashi: There is a huge difference in carbon prices thatbased on what I have heard in Europe, I don t consider it aconfirm what financial institutions should work on to avoid

have been introduced in Japan and elsewhere, but

best practice.

problems with information accuracy, which is a bottleneck,ultimately, global carbon pricing should not differ greatly, so I

Kambayashi: Many major banks from around the world arethrough individual dialogue.

believe it will eventually even out. How can we understandmembers of the NZBA and are engaged in discussions about

Takei: The same is true in Europe. In high-emission industries,

the big price difference that now exists between Japan andhow to measure carbon emissions in investment and loan

including the energy industry, accurate Scope 3 reduction

elsewhere?

Takeshi Wada
Senior Stewardship Oﬃcer
ESG Research and Development Oﬃce
Stewardship Development Department (Tokyo)
Has worked in Japanese and in international equity investment since 1998.
Worked in New York and Edinburgh, UK before assuming his current
position in 2017.

*945

Masaru Okubo
Senior Stewardship Oﬃcer
Sumitomo Mitsui Trust Asset Management Americas (US subsidiary)

Has worked in international equity investment since 1998. Has beenstationed for 16 years in New York, Silicon Valley, and Edinburgh, UK. Has
accumulated knowledge through discussions with many global companies.

S M T AAM
M STEWARDSHIP REPORT 2023/2024

46

Message from the CEO

SMTAM Stewardship Activities

Engagement

Exercise of Voting Rights

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Roundtable Discussion
by Engagement Specialists in Japan, US, and UK

region have already incorporated responses and strategies

includes tax deductions for carbon capture, which is

scope for quota systems from listed to unlisted companies

for this. In our discussions with companies, it seems that in

expected to become a business in the future. Companies inand gender equalization among departments. For example,

industries such as chemicals and cement, there is a firm

Canada are also planning CCUS projects and are requesting

there are many female workers in IR and ESG related teams

policy to actively pursue the use of CCUS. Additionally, there

the Canadian government to make financial policies similar

and management departments, but few in otheris a common understanding in other industries to accelerate

to the US.

departments, so I want to conduct engagement that focuseson such issues.

the transition and advance decarbonization strategies. On
this premise, there is a widespread inclination to consider

Global trends related to diversity

Kambayashi: All cabinet ministers who attended the G7

the use of partial carbon credits in cases where it s not

Kambayashi: Changing topics here, Japan continues to be

Ministerial Meeting on Gender Equality and Women s

possible to fully eliminate carbon emissions.

one of the worst countries in terms of diversity and was

Empowerment were women except for the minister from

Okubo: In the US, there is a trend where energy companies

ranked 125th in the latest world rankings on gender. I think

Japan. Most of the participants from other countries at 30%

use offset techniques such as CCUS and DAC

in theirthat awareness of this issue has improved by individual

Club and Thirty Percent Coalition * 1 2 gatherings that wetransition strategies. They are using natural gas, which is costcompanies as a result of various education activities, but it

participate in are women, and many of the people in charge

competitive, as transitional energy in Japan and overseas

seems to take a long time to overcome the customs of aof overseas initiatives and NGO experts working on issues

while also trying to convert their specialized engineeringmale-dominated society, and movement seems slow

such as climate change are women.

technology. Carbon offsets are based on the premise ofcompared to other countries in this area as well. How do

Takei: Financial institutions and traditional manufacturing

proper carbon pricing, so petroleum groups in the US andpeople in other countries view this?

industries in Europe are still male-centric, and like Japan,

major oil companies such as ExxonMobil have also changed

Okubo: In the US, state laws such as in California andGermany and Switzerland seem to be behind.

their stance by agreeing to implement carbon pricing. The

NASDAQ listing regulations specify a minimum diversity for

Kambayashi: When I used to visit factories and technical

Inflation Reduction Act (IRA) that was enacted last year also

human resources when it comes to gender and race for thelaboratories of major manufacturers in Japan, I asked why

board of directors.

they do not hire more females and foreigners. Their answer

Kambayashi: Recently, the US Supreme Court determined

was that manufacturing is dangerous, so it is difficult forthat such quota systems amount to reverse discrimination

women and for foreigners who cannot communicate well,and are a violation of the Constitution, right?

which made me feel uncomfortable. It is true that it involves

Okubo: That was related to university admissions. The

manufacturing. This existing wall of men s work, men s

Supreme Court has a conservative leaning, and some aresociety seems difficult to take down.

worried about the impact this will have on companies

Okubo: Some advanced companies voluntarily beganpromoting diversity. It s true that zero diversity in terms of

disclosing their gender and racial gap on turnover andhuman resources in a company s board of directors is notpromotion rates and salary. Such data affects employee

good, but there are arguments against rigid quotas that force

engagement. I think it is important as an investor toa certain composition ratio for personnel, such as 50-50

discuss and share with companies about how diversity andmale/female. The prevailing opinion is that skill also needs tofairness are linked with corporate value, and to promote

be considered for selection. The discussion theme for

the PDCA cycle.

dialogue with companies seems to be changing from gender

Soma: Disclosure of human capital has also started inissues including diversity for the whole workplace andJapan. But because it has just started, many companies

management positions to human capital issues by rethinking

are confused about information disclosure, and investors

human resource utilization and rigid career paths.

now need to try to understand the disclosure contents. At

Takei: In Europe, the trend is to expand the application

the same time, analysis is needed not only of the current

target for gender diversity from the board of directors andcross-section but also on the background of each.

committees to senior management. In some countries, theUtilization of females is important in Japan due to thequota system seems to be accelerating diversity in the board

aging population and declining birthrate, and companiesof directors and board of auditors. For example, in France, itwith poor employee engagement are workplaces where it

is mandatory that women comprise at least 30% of executive

is also difficult for men to work. Information disclosure has

positions by 2027 and at least 40% by 2030, and legislation

just begun for initiating discussions for eliminatingin other countries is progressing such as in Germany whereproblems caused by the gender gap, but I expect the

women must comprise at least 30% of supervisory boards. It

contents and quality to improve and that discussions will

seems that future issues will include expanding the target

deepen.

*11

Satoshi Takei
Senior Stewardship Oﬃcer
Sumitomo Mitsui Trust International (UK subsidiary)

Has worked with Japanese equity investment since 2015. Later, he was put
in charge of food and healthcare companies as a Japanese and foreign
equity analyst. Current position since October 2022.

47

Hisaya Kambayashi
Senior Stewardship Oﬃcer
ESG Research and Development Oﬃce
Stewardship Development Department
Worked at subsidiaries in Germany and the UK since 1988 for over 10 years, andengaged in foreign currency asset management. Has much experience with sales
to institutional investors in Japan and overseas. Current position since 2017.

*1.

Normative scenario in harmony with efforts to limit the increase in the average
global temperature to 1.5ºC compared to pre-industrial levels.
*2. Other indirect emissions outside of Scope 1 (direct emissions) and Scope 2(indirect emissions such as electricity).
*3. Abbreviation for International Sustainability Standards Board, which is anorganization that formulates the IFRS Sustainability Disclosure Standards asinternational standards allowing companies to report on environmental, social,and governance (ESG) fields.
*4. Various issues related to the production process, including environmental
problems and human rights and labor issues related to the supply chain, andclimate change issues due to deforestation.
*5. Asian investor association on climate change.
*6. Abbreviation for Glasgow Financial Alliance for Net Zero. A global coalition offinancial institutions committed to achieving carbon neutrality by 2050.
*7. Partnership for Carbon Accounting Financials. Framework for rational calculationof greenhouse gas emissions by the party receiving funds from financial
institutions through loans and investments.
*8. International initiative where the United Nations Environment Programme FinanceInitiative (UNEP FI) is the secretariat. Consists of private banks (including
investment banks) that aim to achieve net zero greenhouse gas emissions by
2050 through investment and loan portfolios.
*9. Reduction targets, etc. for greenhouse gas emissions that must be created,
reported, and maintained by each country according to the Paris Agreement.
*10. Policy method that puts a price on the CO (carbon) emitted by companies, etc.,
and is used to change the behavior of emitters. Methods include well-known
systems such as carbon tax and emission trading.
*11. Abbreviation for Direct Air Capture and is technology for direct air capture.
Special absorption liquids and filters are used to separate and collect low
concentration CO₂ that exists in the air.
*12. An investor network that promotes greater diversity on the boards of directors atinvestee companies.

S M T AAM
M STEWARDSHIP REPORT 2023/2024

48

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Making the Tokyo Market More Attractive
and SMTAM Initiatives

Making the Tokyo Market More Attractive and SMTAM Initiatives(3) Response to the Action Program for Accelerating Corporate

Principle 5-2 of Japan s Corporate Governance Code, giving a

Governance Reform: From Form to Substancestrong message to listed companies and market participants.

As a specific initiative in this program, resolution of legal

1. Introduction(Main contents)

This series of initiatives accomplishes more than just narrowing

issues was mentioned, and that there will be further

As stated in the Asset Income Doubling Plan of the Basic

Listed companies are requested to conduct a series ofdown listed stocks to specific quality companies. They raise

discussions on clarification of the act of making important

Policy on Economic and Fiscal Management and Reform

actions on an ongoing basis, starting by gaining a proper

the level of all listed companies and the Japanese market.

s u g g e s t io n s

an djo in t h ol d er s

und er t he l ar g eshareholding reporting rule, transparency of beneficial

2023 (Honebuto no Hoshin), in order to achieve financial

understanding of their own cost of capital and profitability,

inclusion where the benefits of financial and capital markets

and then analyzing and assessing the current situation

are distributed to all citizens, expectations are raised thataround these and the market valuation at board meetings,

initiatives will impro v e the corporate v alue o f listed

preparing and disclosing plans for improvement, and then

We are pursuing our three key pillars of stewardship activities

thecompanies, who are recipients of risk money, and for theusing dialogue with investors to update them on thethat are built around engagement, the exercise of voting

Shareholding Reporting Rule of the Financial System

progress of these efforts.

rights, and incorporating ESG factors into investment

Council of the Financial Services Agency in June 2023, andinvestment chain.

3. Efforts by SMTAM to make the Tokyo market more
attractive and increase corporate value

shareholders, and how to protect minority shareholders in
the case of partial takeover bids. Consideration began byWorking Group on Tender Offer Rule and Large

In this situation, efforts are accelerating to improve the(3) Financial Services Agency Opinion Statement No. 6 fromdecision-making processes in order to help improve corporate

we are the only institutional investor to joined (Senior

attractiveness of the Tokyo market not only by investors but

the Council of Experts Concerning the Follow-up ofvalue and maximize investment return. With engagement, inManaging Director, Mr. Horii, is a member).

also by the investment chain including security exchanges andJapan s Stewardship Code and Japan s Corporate

order to more effectively resolve issues, we focus on

regulatory authorities.

Governance Code - Publication of the Action Program for

multi-engagement not only with investee companies but also

4. Future expectations

Accelerating Corporate Governance Reform: From Form towith stakeholders including security exchanges and regulatory

In order to make the Tokyo market more attractive by improving

Substance (April 2023)*3

authorities who are in a position to promote sustainability andcorporate value, we believe that it is essential to work across(Purpose)

improve the value of listed companies by listing rules andthe entire investment chain, rather than in individual silos. It is

To create an environment that promotes self-awarenessvarious regulations.

important to collaborate with investment chains including& Research, the Tokyo Stock Exchange, and the Financial

among companies and investors, and make the dialogue(1) Engagement with JPX Market Innovation & Research

improvement and development of indices used for investment,

Services Agency (created by SMTAM based on disclosed

between companies and investors more productive and2. Investment chain initiatives to improve the attractiveness of
the Tokyo market.
This section will introduce initiatives by JPX Market Innovation

In addition to individual dialogue, we are continuing to

improvement of listing systems and information disclosure

contents by each company/agency).

more effective.

engage in activities as a member of the Index Advisor

systems, and support from authorities. We feel that measures to(1) JPX Market Innovation & Research - Publication of the new(Main contents)

Panel and in dialogue by submitting our opinions, etc. atencourage management with an awareness of profitmaking

JPX Prime 150 Index focused on value creation (March

Action program formulated to promote self-awareness by

the Index Consultation.

and growth based on the cost of capital2023)

listed companies in order to accelerate and strengthen

For example, we expressed our opinion that it is desirable

published this spring were the start of this movement.

(Purpose)Japan s corporate governance reforms.

for TOPIX to be comprised of companies not held by

Such collaboration with related organizations has a powerful

The JPX Prime 150 Index is designed to make leading

Recommendations were made on measures andspecific shareholders, but rather those capable ofimpact on improving corporate value, and we believe that thisalso makes investors, including those outside Japan, expect*1

for companies

Japanese companies that are expected to create value

discussion contents related toissues for seeking

continuing constructive dialogue with investors. There ismore visible, and to make the index and its constituent

sustainable corporate growth and increased corporate

also a need for systems that protect minority shareholders,Japanese companies to make innovative changes and increases

stocks the target of medium- to long-term investment byvalue over the medium to long term and issues related

and it is important to consider the presence or absence oftrust in the Tokyo market, which will drive investment funds.

to dialogue between companies and investors.

information disclosure on corporate value creation, similar

We expect such movements to accelerate, and SMTAM will

to integrated reports. We also informed our opinion on thecontinue engaging with the investment chain. We will also

institutional and individual investors in Japan and abroad,thereby contributing to the penetration of value-creating

Regarding any of the above (1), (2), and (3), the common key

management and enhancing the appeal of the Japanese

expression is management with an awareness of profitability

stock market.
(Main contents)
Stocks are selected using two indicators to determine
value creation: equity spread, the difference between
ROE (return on equity) and cost of equity, and PBR, a

Figure 1. Direction of the Prime Market: Improving the corporate valueof each listed company
Market capitalization(Median value)
300 billion yen

Distribution of market capitalization (median value)
and number of listed companies

market valuation based on stock price. These are
expected to create value.

A new stock price index

200 billion yen

comprised of these stocks was developed and published.
(2) Tokyo Stock Exchange - Action on Cost of Capital-Conscious
Management and Other Requests (March 2023)*2

100 billion yen

London (Premium)

Germany (Prime)(Purpose)sustainable growth and enhancing corporate value overthe medium to long term, and while not mandatory under
目標TSE rules, listed companies are requested to proactively

implement these in consideration of investor expectations.

NASDAQ (Global Select)

When the number ofcompanies is simply
narrowed down

0 billion yen
0 companies

1,000 companies

need to improve the system and platform so that ESG

share best practices on reforms to the Tokyo market throughinformation disclosed by companies through exchange candialogue with exchanges outside Japan in order to promote

be acquired and viewed.

improvements to the global capital market while also working(2) Engagement with the Tokyo Stock Exchange
In addition to individual dialogue, we submitted our
opinion on theConsultation Paper Concerning the

Follow-up of Market Restructuring.

to convey the appeal of the Tokyo market.
*1. https://www.jpx.co.jp/corporate/news/news-releases/0060/20230330-01.html*2. https://www.jpx.co.jp/news/1020/20230331-01.html*3. https://www.fsa.go.jp/news/r4/singi/20230426.html

For example, regarding companies that have had asignificantly low market value in the Prime Market over a

1,000 companies

Prime Market(Excludes companies
that disclosed compliance plans)

To summarize matters considered important for achieving

Circle area:
Total market
capitalization

NYSE

750 companies

positioned as leading Japanese companies that are49

and growth based on the cost of capital, which is stated inlong period, we expressed our opinion that a system be

Direction of the Prime Market:
Improving the corporate valueof each listed company
1st Section
Prime Market

Hong Kong(Main Board)

2,000 companies

3,000 companies

Number of listed companies
Note: Data acquired as of April 1, 2022 for TSE (former market) and as of July 1, 2022 for others(Source: Created using published materials from each exchange)
Source: TSE Reference material (Discussions and current status at follow-up meetings)

established to encourage such companies to make effort
to raise the market value, such as by disclosing asustainability index and establishing standards including
KPIs together with medium- to long-term ROE targets andcash flow forecasts, and that such efforts and disclosure bycompanies be used as materials for dialogue with investors
for improving corporate value, which can improve
effectiveness.

Dialogue with exchanges outside JapanS M T AMA M STEWARDSHIP REPORT 2023/2024

50

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Initiatives for Promoting Financial Literacy

Activities by SMTAM to Promote Financial Literacy for Increasing Investors

Direct Feedback from the Financial Community
We engage in various activities to communicate with the financial community. We regularly exchange ideas and hold events with
the USIC*1 university student investment circle and with the KINYU-JOSHI*2, which is a female-led financial community. This is
our fourth year collaborating with the USIC. We have been able to have regular exchange with core student members and hold

Helping People Understand the Benefits of Investment
We are engaging in activities to promote financial literacy for increasing investors. Rather

study sessions with members.

Raku-kun mascot character

than focusing on an approach based on the so-called 20 million yen problem thatand roundtable discussion with women on investmentemphasizes the anxiety faced after retirement, we focus on developing society throughLast year, we became a sponsor of the financial information magazine

investment, finding enjoyment by contributing to this, and experiencing social dynamism

SPOCK, issued annually by the USIC, with the goal of improving thethrough investment with the goal of developing investors with a long-term perspective

financial literacy of university students. In SPOCK (vol. 27), a roundtable

while learning about investment in a positive way.

discussion with female members of the USIC was published. We

The Financial Literacy Promotion Office is making effort to develop cyclical economic

interviewed four female members who attended the roundtable andgrowth through money and investment based on the message Watashi mo hataraku,
Okane mo hataraku (I work, and money works).

USIC: Sponsor of the financial information magazine SPOCKThis mascot character is designed
to look like the Japanese character Raku.
Raku can include the meaningof economic affluence.

asked why they joined the USIC, how they came to be interested ininvestment and finance, and about their life plan and asset formation inorder to help university students who have not joined the USIC and newstudents become interested in investment and finance and make themthink about their future.

Classes Held at Elementary, Junior High, and High Schools
to Teach Students about the Basics and Importance of Investing
Since our activities started in 2022, a total of 270 students from four schools participated in our investment education activities.
We are teaching how investment is a way to support companies based on the theme, Understanding how investing promotes apeaceful and sustainable society. To help children understand the unfamiliar concept of investment, we tried a number ofmethods, including using the Raku-kun character and starting with the topic of SDGs. We have received positive feedback fromstudents taking the classes, which shows they could find joy in understanding the contents. This year, we are working to makefurther improvements to the program so it is easier to understand financial matters. This is the second year, and we are trying to

KINYU-JOSHI YouTube video production / Girls Night Out
We made a YouTube video and held acollaboration with the

KINYU-JOSHI

GirlsNight Outinas part of an event called,

Understanding NISA and Reverse Investment in 2024 with help fromSMTAM.

We collected feedback from members, including theirconcerns about investments and thoughts on the new NISA, captured
these moments in videos and reports, and shared them on YouTubeand Instagram.

help young people become more familiar with the financial world.

Co-Sponsor of Mirai no Jugyo (Future Classes)
Showa Women s University Elementary School■ December 1, 2022
■ Total of 107 5th-grade students

Students showed a positive attitude during group work discussions,and many made comments during the presentation.

Same as last year, we are planning to donate the SDG-related publication Mirai no Jugyo (Future Classes)
published by SENDENKAIGI to 35,000 elementary, junior high, and high schools throughout Japan. Whileawareness of SDGs is increasing by promoting understanding at schools and promoting the understanding ofpeople in general through mass media, we posted an advertisement in the publication for the fourth time so
事例

that our SDG activities can be known to students, faculty, and guardians. We view this as an opportunity forsuch people to recognize the social role asset management companies play.

Conclusion: Developing Future Investors
Linking investors with companies that engage in initiatives to resolve issues through investment increases people s assets, which
Funabashi Gakuen Toyo High School■ November 1, 2022
■ Total of 82 students and faculty from grades 1 to 3

Students from all grades and faculty members willingly participated in an
extracurricular class hosted by the principal. According to a survey, theportion they remembered most was the key message Watashi mo hataraku,
Okane mo hataraku (I work, and money works). We could see firsthand thatstudents had a deep understanding of the information.

51

ultimately helps resolve world issues. Our desire is to help as many people as possible understand the importance of suchinvestment and help people find companies they want to support through investment. We believe that by continuing to educate
peopleon the power of investment through classes and events, more people will come to understand our ideas and participate in
事例
investment, which will help resolve many issues.

*1. USIC (Union of Student Investment Clubs) is the largest student organization in Japan related to finance with over 1,100 students from 32 universities. Founded in 2008, theinitiative has been committed to advancing the financial literacy of students, with the vision of turning Japan into a financial power through the investment activities of its
students. Its main activities include jointly holding study groups and seminars with finance-related companies in Japan and overseas. Recently, they have been working toestablish an environment where young people can easily begin investing by focusing on dissemination via media and working on system-related initiatives.
*2. Financial community established by women in their 20s and 30s who are not familiar with finance for women who are not familiar with finance.

S M T AMA M STEWARDSHIP REPORT 2023/2024

52

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Exercise of Voting Rights
Stricter Standards for Exercise of Voting Rights Related
to Appointment of Female Directors and Cross-Shareholding

Purpose of Exercising Voting Rights

Revisions to the Principles for Exercising Voting Rights

As a responsible institutional investor, we position the exercise of voting rights on entrusted assets (hereinafter referred to as

We revised the Principles for Exercising Voting Rights in January 2023 (published in December 2022). The main point of theexercise of voting rights ) as one of our important stewardship activities. The purpose of exercising voting rights is to maximize

revisions is to make standards for the appointment of female directors, for cross-shareholding, and for takeover defense

the medium- to long-term investment returns for clients (beneficiaries) by improving the corporate value of investee companies

measures more strict.

and promoting sustainable growth.
Please visit our website for more details.

We made the standard for appointing female directors that if there are no female directors, we vote against appointment ofhttps://www.smtam.jp/institutional/stewardship̲initiatives/stewardship̲activities/voting̲index/voting̲thoughts.html

directors more strict. This standard was newly established based on revisions made in January 2022, and the scope was set toinclude TOPIX100 companies at that time. However, in January 2023, the scope was revised to include TOPIX500 companies.
We will continue to expand the target scope in the future.

PDCA in the Exercise of Voting Rights
We established a Stewardship Activities Advisory Committee that is made up of independent external experts for ensuring theproper exercise of voting rights. Our operations are carried out through proper monitoring based on clear decision standards inharmony with our guideline established after consulting with the Advisory Committee. The Advisory Committee plays animportant role in the following PDCA cycle.

We made the standard for cross-shareholding that if a company has excessive cross-held shares, we will object to theappointment of directors who have served for more than three years more strict. This standard was added to revisions made inJanuary 2021 to clarify the statement, We may vote against depending on the engagement status. When this was added, it
stated that we would consider voting against, but with the January 2023 revision, we positioned the reduction of cross-heldshares as a minimum standard of governance and established specific criteria. Moreover, we set the standard for the top
10th percentile level of TOPIX stocks since we intend to continually request reduction.

Guideline revisions

Formulation and publishing of guidelines

In addition to analysis of the execution results, the guideline is revised

The guideline for determination standards on the exercise of voting

and published as needed based on confirmation of changes in social

rights is formulated and revised by the Executive Officer in charge of theJapan s Corporate Governance Code, engagement with investee

Sustainability Committee and after consulting and reporting to thecircumstances such as revisions to Japan s Stewardship Code andcompanies, and recommendations by the Advisory Committee.

Stewardship Development Department after examination by theAdvisory Committee.

We changed our standard for introduction/renewal of takeover defense measures toprincipally vote against

introduction/renewal of takeover defense measures to make it more strict. When this standard was revised in October 2017, it
stated that we may agree when a majority of the board of directors is external directors whose independence is recognized.
The intent was to show that although we are principally against takeover defense measures, we approve their introduction forcompanies with a highly independent board of directors as an exception. Later, our opposition ratio for such proposals
remained over 90%, and since there are some cases where emergency takeover defense measures were approved by judicial

Analysis, reporting, and disclosureof voting results

decision starting in 2022, we determined that implementation of pre-warning-type takeover defense measures was no longer

A

P

C

D

Results from the exercise of voting rights are analyzed and thenreported to the Sustainability Committee and Advisory Committee.

meaningful and so revised this in January 2023.

Main revisions to the Principles for Exercising Voting Rights
Decision to exercise
individual proposals

an execution draft is created by the Stewardship Development

Department. The General Manager of the Stewardship Development

results from the exercise of voting rights for business partners can be

guideline before making a final decision. If the decision is different from

confirmed by a third party.

Revised contents

Criteria● Regarding independency standards for external officers, the supplementary provision on long terms of office was removed

Composition of the board of directors,
appointment of directors● Made the standard regarding the appointment of female directors more strict

Takeover defense measures● Revised stance on pre-warning-type takeover defense measures to principally vote against

For proposals that can be determined based on the guideline,

In addition, the results from the execution of all proposals are published.
Moreover, when published, business partner flags are given so that

Revised items

Department confirms that the decision is in compliance with thethe guideline or there is no applicable rule in the guideline, the● Made the standard regarding cross-held shares more strict

Sustainability Committee holds a discussion, and then the Advisory

Committee verifies the propriety of the decision process. The Executive
Officer in charge of the Stewardship Development Department makes

the final decision on execution while following the recommendation of
the Advisory Committee to the extent possible.

In order to help visualize the above process, we publish guidelines and deliberation contents by the Advisory Committee(summary), and disclose results from the exercise of voting rights for each proposal (in addition to disclosing the existence ofbusiness relationships with Sumitomo Mitsui Trust Group and reasons for opposing).

53

S M T AAM
M STEWARDSHIP REPORT 2023/2024

54

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

Cases Where the Exercise of Voting Rights Was Determined Based on Engagement
Rather than deciding based on formalistic standards, before exercising voting rights, SMTAM carefully considers the

ESG Integration

Record of Exercising Voting Rights for Japanese Equity (July 2022 to June 2023)
Company proposals

circumstances of investee companies and engagement contents with the relevant company and then determines whether it
leads to the sustainable growth of the investee company.

Proposals concerningcompany systems

The following are cases where we exercised voting rights based on engagement.
Cases where the exercise of voting rights was determined based on engagement
Code

Company

Proposal

Voting record

Decision contents

Proposals concerning remunerationfor executives

3994

Money Forward[Company proposal]
Appointment of directors

For- However, through engagement, we were able to confirm that (1) the company deficit was due to cost of up-front
investments for improving future corporate value, (2) the user cancelation rate is low at 1.3% and up-front investment
was determined to be rational, and (3) they plan to have a surplus based on EBITDA in the November period of 2024.

For

AgainstAbstention

Total

Opposition ratio

14,5004,198

018,698

22.5%

Appointment/dismissal of corporate auditors

1,928

275

0

2,203

12.5%

Appointment/dismissal of accounting auditors

96

0

0

96

0.0%

642

100

0

742

13.5%

Appointment/dismissal of directors

Remuneration for executives*1
Payment of retirement benefits for resigning executives
Disposal of surplus funds- This company had an operating income deficit in three consecutive periods, so according to our standards for the
exercise of voting rights, we should vote against directors who have served for more than three years.

Proposals concerning capital policies(Excluding proposals concerning articles
of incorporation)

Restructuring-related*2
Introduction/renewal/abolishment of takeover defense measures
Other proposals concerning capital policies*3

Therefore, we made an exception and voted for.

Proposals concerning articles of incorporation- This company had already disclosed their forecasts that the net asset ratio for cross-held shares (including deemed

8306

Mitsubishi UFJ[Company proposal]

Financial Group

Appointment of directors

holdings) will drop to 22.52% after the next medium-term management plan starting in FY2024 when only those forFor

which sale has been approved by the owner are reflected. We explained that this holding level will still be considered
excessive, so we confirmed their policy for future reduction.
- As a result, we could confirm that their policy is to increase reduction in the next medium-term management plan,
which they are now preparing, so determined that this was an exception and voted for.
- At their annual meeting of shareholders in 2022, a proposal was made by shareholders requesting this company toenhance their action on climate change, and at the time, reduction targets in the investment and loan portfolio targeted[Shareholder proposal]

8316

Sumitomo Mitsui
Financial Groupto the articles

Againstof incorporation

we voted for the proposal by shareholders.
- Although targets for reduction goals were only for three sectors (electric power, oil and gas, coal), as of May 2023, they
sectors with high greenhouse gas emissions during FY2024.
- Based on the fact that we could confirm progress with this company s initiatives for responding to climate change and that
it will be possible to see their emission coverage rate from now, we voted against the shareholders proposal in 2023.
- Since this company had not appointed any female directors, we explained that we need to vote against proposals forappointment of directors. We then confirmed their concept on the appointment of female directors, and they explained

Nippon Television[Company proposal]

Holdings

Appointment of directors

Total

For

that they were working on their appointment the following year. We requested them to announce this if possible.

0

91

0

91

100.0%

1,469

57

0

1,526

3.7%

38

0

0

38

0.0%

1

84

0

85

98.8%

58

0

0

58

0.0%

767

11

0

778

1.4%

4

0

0

4

0.0%

19,5034,816

024,31919.8%*1. This includes amendments to remuneration for executives, issuance of stock options, introduction/alteration of performance-linked remuneration systems, and executive bonuses*2. This includes mergers, business transfers and acquisitions, share swaps, share transfers, and corporate splits*3. This includes treasury stock acquisitions, decrease in statutory reserves, new share allocations to third parties, decrease in capital, reverse stock splits, and issuance of class shares

Shareholder proposals
Total

presented a plan to set targets for two other sectors (steel, automobile) during FY2023, and to set targets for all nine

(Response to climate change)

9404

Other proposals

only the electric power sector. We determined that their attitude toward climate change initiatives was insufficient, so

Partial amendment

Reference

Disclosure of Climate-related Financial Information under TCFD

For

AgainstAbstention

Total

Opposition ratio

39

365

0

404

90.3%

Factors that affect the result of exercising voting rights and the opposition ratio
When comparing the opposition rate to company proposals with the same period last year, there was an increase attributed to stricter standards regarding the appointment offemale directors, cross-shareholding, etc., but overall, there was a slight decrease because enhancements with the investee company governance systems (such as an increase in
number of independent external directors) offset this increase.
With regard to stock lending transactions, we set loan limits for securing voting rights. For voting rights secured in shares outside of the loan limits, we exercise said rights
in accordance with our policy on the exercise of voting rights. In daily processes, our portfolio managers confirm positions such as the number of lent stock.

- Later, as a supplementary explanation for a proposal at the general meeting of shareholders, they announced that there
would be proposals for female candidates as directors at next year s general meeting. Since we could confirm theirpolicy on the appointment of female directors, we voted for (excluding external directors with many years of service).

Record of Exercising Voting Rights for Foreign Equity (July 2022 to June 2023)
Enhancing Visibility for Approvals and Disapprovals in Voting Activity

Company proposals

disclose their voting rational with respect to either for or against vote, which are considered important from the standpoint

Proposals concerning company systems

of constructive dialogue with the investee companies, including those perceived to have conflicts of interest or those which
need explanation in light of the investors voting policy.
We have published reasons for voting against company proposals, however since the disclosure of individual voting records inJuly 2020, we also began publishing all reasons for voting, regardless of whether it is for or against, on proposals perceived

Proposals concerning remunerationfor executives

proposals which need explanation in light of the investors voting policy in the section below.
8975 Ichigo Office REIT, General meeting in June 2023
Proposals No.

Proposal

Voting record

Background / Reason- Investors made an investor proposal requesting the lowering of asset management fees,
and the investment corporation made a counter proposal. We decided to vote based on
the investor value judgment for both proposals.

1 to 811 to 14

Revision to asset management fees,- Regarding earnings/dividend performance remunerations, there was no rational explanation

appointment of executive officers,[Investment corporation proposal] For

about the level after reduction in the proposal by the investment corporation, so we

appointment of supervisory officers,[Investor proposal] Against

determined that Proposal 9 by the investors was appropriate. However, since Proposal 9 wasrevision to remuneration for executives, etc.

withdrawn by the investors, we voted for the proposal by the investment corporation.
- Regarding the appointment of officers, based on concerns of a conflict of interest, we

Proposals concerning capital policies(Excluding proposals concerning articles
of incorporation)

55

Total

Opposition ratio

1,722

0

15,594

11.0%

553

96

0

649

14.8%

Composition of board of directors (limits on number of directors, etc.)

332

15

0

347

4.3%

Appointment of accounting auditors

2,209

29

0

2,238

1.3%

Remuneration for executives

3,230

487

0

3,717

13.1%

547

410

0

957

42.8%

Stock options

10

2

0

12

16.7%

Shareholders equity

3,301

529

0

3,830

13.8%

Profit disposal and loss disposition plans

1,567

3

0

1,570

0.2%

Establishment of share buyback frameworks

886

48

0

934

5.1%

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

732

169

0

901

18.8%

Takeover defense measures

186

10

0

196

5.1%

Proposals concerning articles of incorporation

1,344

375

0

1,719

21.8%

Other proposals

8,921

1,152

0

10,073

11.4%

37,6905,047

042,737

11.8%

For

AgainstAbstention

Total

Opposition ratio

1148

543

0

1,691

32.1%

Total

Shareholder proposals

opposed the proposal by investors. Therefore, we voted for all proposals by theinvestment corporation, and voted against proposals by investors.

Abstention

13,872Presentation of retirement benefits

to have conflicts of interest or those which need explanation in light of investors voting policy. We introduce the details of

AgainstAppointment/dismissal of corporate auditors

Appointment/dismissal of directors

Principle 5 of Japan s Stewardship Code, which was revised in March 2020, says that in particular, institutional investors should

For

Total

S M T AAM
M STEWARDSHIP REPORT 2023/2024

56

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

SMTAM s ESG Integration

ESG Integration

MBIS® *2
MBIS® is our unique system for evaluating the medium- to long-term sustainable growth of companies utilizing non-financial information

We have identified 12 important ESG issues as ESG materialities. We conduct non-financial evaluations using our

including ESG elements. We started performing such evaluations for Japanese companies in 2015, and are using these for ESG integration

in-house ESG score calculation based on ESG materialities and MBIS®, which is a proprietary system, and reflect

related to Japanese equity and Japanese bond investments. Our analysts use this to help them gather, analyze and evaluate non-financial

these into our investment decision-making process according to portfolio characteristics in order to maximize

information which cannot be expressed in terms of financial data for the companies they cover; such information includes the level andinvestment return.

sustainability of added value for a company s products and services, the governance system which supports the added value thecompany provides, and the company s impact on the societal and environmental foundations which sustain its growth. MBIS® is anabbreviation for Management, Business Franchise, Industry, and Strategy, and it also incorporates our in-house ESG score evaluations foreach evaluation item. In this way, we consider the impact of the investment opportunities and risks through the initiatives of eachcompany for ESG issues for the creation of new markets and business models such as commercialization and monetization on medium- to

SMTAM s ESG Integration

long-term sustainable growth of each company. We incorporate the concept of the SDGs and the 17 goals into our evaluation.

In-house ESG score

MBIS®

Consideration of ESG factors
for investment- ESG issues that SMTAM- Calculation based on ESG- Our proprietary system for- Reflection to investment

considers importantmateriality

non-financial evaluations

ESG materiality

decisionsManagement

B

Business FranchiseI

Industry

S

Strategy

Organizational ability (Checklist 5 items)
Diﬀerentiating factor (Checklist 5 items)

Reference

Client base (Checklist 3 items)
Market growth potential (Checklist 2 items)
Competitive environment (Checklist 5 items)
Skillful investment (Checklist 5 items)

ESG materiality

ESG materiality

M

External ESG data /Qualitative evaluation

ESG integration process

Overall MBIS ® score

In-house ESG scores
Management group (Checklist 5 items)

Skillful withdrawal (Checklist 2 items)

ES

important for improving the value of the investee company

Climate Change Issues

Human Rights & Community

Behavior

and promoting sustainable growth. We consider this ESG

Natural Capital

Human Capital

Structure

Pollution & Waste

Safety & Responsibility

Security & JusticeRegarding equity in companies that produce cluster bombs, anti-personnel landmines, and biological and chemical weapons, which

Environmental Opportunities

Social Opportunities

Governance Improvement

exclude them as an investment target in active funds (equity/bonds). Later, we reflect the MBIS® and in-house ESG score to the

ESG materiality refers to ESG issues that we view as
Riskmateriality when performing ESG investment including ESG

Gevaluation of investee companies, engagement activities,
and decisions for exercise of voting rights.

Opportunity

Consideration of ESG factors for investment
are considered to be controversial weapons based on ESG materiality, if engagement is not possible due to company reasons, weinvestment decision according to the characteristics of each asset.

In-house ESG scores

12 important ESG materialities

Principally, we give an in-house ESG score on the investment universe for the whole asset. The in-house ESG score is ourinvestment evaluation index given from the perspective of investors after analyzing the impact of opportunities and risks resulting

ESG screening

from ESG issues on nations, companies, etc. It is calculated based on ESG materiality by utilizing external ESG data and by

All active products: Screening by ESG related issues*3

reflecting information acquired through research activities by analysts and engagement activities, and then reflecting the analysis
results. In order to select brands and determine the investment weight, we add company performance, financial status and
ESG integration

valuation for equity and REIT, and add credit evaluation and spread evaluation for Sovereigns and corporate bonds.

SMTAM in-house ESG score - Overview by asset

Target assets

EquityBonds(2) Quantitative evaluation(3) Qualitative evaluation(4) In-house ESG score

Various data fromthe World Bank, etc.

External ESG data, etc.*1

External ESG data,etc.

Utilization of information and analysis results acquired through research activities by analysts and engagement activities

Japanese equity

Foreign equity

Corporate bonds(Japan/Foreign）

Sovereign

J-REIT

G-REIT

ESG monitoring

Foreign equity

Corporate bonds(Foreign)

Sovereign

J-REIT

G-REIT

Investment universe evaluation based on in-house ESG score

Evaluation
by MBIS®

Reflection to investment decisions

ESG evaluation by
Sumitomo Mitsui Trust
Research InstituteCorporate bonds(Japan)ESG investment evaluation(Non-financial information)

REIT

12 important ESG materialities(1) Evaluation items

Japanese equity

Evaluation
by MBIS®

Investment decision-making in line with portfolio characteristics

Sustainability Committee*1. We use data such as from external ESG data vendors as references for our own ESG quantitative evaluations. We have engagement with ESG vendors at least once a year to
confirm and improve service contents based on what we use (universe expansion, higher data accuracy, better information on misconduct, etc.).
*2. MBIS® is the registered trademark of Sumitomo Mitsui Trust Asset Management.
*3. Screening results are limited to nine companies. Moreover, there has been no change with these nine companies over the past year (as of the end of June 2023).
Anhui Great Wall Military Industry Co., Ltd., Aselsan Elektronik Sanayi ve Ticaret AS, LIG Nex1 Co., Ltd.

Poongsan Corp., POONGSAN HOLDINGS Corp., SNT DYNAMICS Co., Ltd., SNT Holdings Co., Ltd., China Aerospace Science & Technology Group Co., Ltd., Israel Aerospace Industries Ltd.

57

S M T AMA M STEWARDSHIP REPORT 2023/2024

58

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

SMTAM s ESG Integration

Japanese Equity ESG Integration

Foreign Equity ESG Integration

Cases of Japan Quality Growth Strategy(Research, ROE Improvement)

The following will explain Japanese equity research and ROE improvement strategies as examples of Japanese equity ESG

Long-term investments are made in companies where

integration. The investment universe for this fund is around 500 stocks given priority coverage by our analysts. These wereresolving social issues is a growth driver. By utilizing

narrowed down to about 100 stocks based on (1) stocks with the highest MBIS® score, and (2) 5-year performance forecasts byknowledge obtained through company research,

analysts (future sales trends, business margins, and ROE). Portfolio managers thoroughly discuss the MBIS ® score and future

engagement, and participation in global initiatives, we areforecasts with analysts based on the Value Proposition, which is the source of the added value, and the Growth Frontier,able to identify social issues requiring resolution, andwhich indicates market development and creativity, as evaluation axes. Items with a low MBIS score are eliminated from theextract investment target companies based oninvestment universe even if these have a high future forecast, and items with a high MBIS score are kept in the investment

quantitative analysis. We measure Impact KPIs for each

universe even if these have a low future forecast. After conducting interviews with management and business representatives,company, and carry out engagement based on this in

together with analysts, portfolio managers re-evaluate the MBIS® score to narrow it down to around 50 potential stocks. During

order to increase the probability of obtaining social anddiscussions with analysts, priority is given to ideal corporate value. Company potential indicated by the MBIS score such as

economic return.

®

®

®

Cases of Global Equity Impact Investment Strategies

Overview of investment process
ESG research
ESG

Engagement
Exercise of voting rights
PM

AN

Quants research
Corporate research

ESG

PM

QA

AN

the possibility of the investment candidate s market capitalization doubling over the next three to five years, room for improving
their position in the industry, and expectations for improved profit margin by reforming the earnings structure are shared.

Investment decision

Impact KPI

PM

PM

AN

ESG

Portfolio construction process
Asset class (All listed stocks in Japan)

MBIS®
evaluation

800 stocks covered by analysts*

Higher rank insame evaluation

Qualitative and quantitative screening(Investment universe: 100 stocks*)

Confidence
evaluation

Stock selection

Portfolio managers

QA

Quants analysts

AN

Corporate analysts

ESG

ESG specialists- Top MBIS® scores by analysts (500 stocks)- Screening according to quantitative standards such as sales growth rate,business margin, and ROE (Forecast by analyst)- Thorough discussion with analysts on MBIS ® score and forecast using

Qualitative screening(Investment candidate: Around 50 stocks*)

Value Proposition and Growth Frontier as evaluation axes
■ Share background of items with a high score but low forecast- After additional research, etc., a portfolio manager re-evaluates the MBIS score

Stock pricedetermination- Consider the implications of stock price level (overpriced/underpriced) for

Portfolio(20 to 50 stocks*)

Passive ESG Integration
SMTAM provides a wide range of ESG investment products for all assets, even with passive investment, from two perspectives:■ Elimination of items with low MBIS® score despite high forecast®

Stock pricedeterminationPM

candidate stocks and construct a portfolio(1) providing a variety of investment opportunities for clients ensures return on investment while also helping to improve thesustainability of society and companies, and (2) this contributes to stewardship activities since ESG investment leads to changes
in corporate behavior.

SMTAM s ESG passive investment strategy map* As of the end of June 2023. Brand numbers are approximate since they ﬂuctuate.

Comprehensive type
Japanese equity
MSCI Japan ESG
Select leaders index-tracked type

Expressing opinions on business strategies and responses to ESG issues
Hypothesis presentation

SMTAM
MBISⓇ
- Identifying source of competitiveness and management issues

Investee company(Managers)

Engagement- Identifying growth inhibitors from the perspective of ESG- Establishing hypotheses based on these

Japanese equity

Developed Market equity (Excluding Japan)

LGIM Japanese equity

MSCI Kokusai ESG

ESG index-tracked type

Leaders index-tracked type

Developed Market equity (Excluding Japan)

Emerging Market equity

LGIM Foreign equity

MSCI Emerging ESG

ESG index-tracked type

Leaders index-tracked type

Global bonds
Bloomberg MSCI
Global Aggregate (Including Japanese yen)
Sustainability A+
Global bonds
Bloomberg MSCI
Global Aggregate(Excluding Japanese yen, open currency)
Sustainability A+

Stocks screening type

Weight tilt type
Hypothesis verification
Japanese equity
S&P/JPX

Improving return on investment
Enhancement of MBIS® / engagement

59

Improving corporate value

Carbon Efficient Index-tracked typeSpecific topic type* Quadrant using the vertical axis and horizontal axis to show the diﬀerent types.
The position does not indicate the degree of each type.
Source: SMTAMS M T AMA M STEWARDSHIP REPORT 2023/2024

60

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

ESG Integration

SMTAM s ESG Integration

Bond ESG Integration(1) Select non-investable securities

voting rights, as a direct funder, we
believe that they have an important
position for corporate management.

Stewardship
Development Department

Therefore, as a bondholder, while we

Sovereign ESG Integration[Take ESG into consideration and identify non-investable securities]
Prohibit investing in companies that manufacture inhumane weapons. This applies

Investing in sustainable government bonds can be a way to reduce future risks while pursuing stable return, and it is believed thatto all assets.

investment that takes ESG into consideration is important when considering government bonds (hereafter referred to as

have the right to ask investee

sovereigns). Incidents such as Russia s invasion of Ukraine have greatly affected the order of international society, and have

Have an outlook for the spread with a top-down approach and decide
on a position building policy based on spread situation judgment considering a credit cycle.

companies to take measures forreminded us of the importance of considering ESG factors when investing in sovereigns. To meet the needs of our clients, we also

medium- to long-term growth and toprovide funds that integrate sovereign ESG evaluations.

reduce downside risk, we also believe(2) Evaluate creditworthiness

we have responsibilities to request[Give in-house rating with ESG factors taken into consideration when evaluating creditworthiness]social contribution.
We are unique in that our credit andCredit analysts- Take ESG factors into qualitative determination.
(Evaluate using MBIS® and in-house ESG scores.)improve the sustainability of investee(3) Evaluate spreadcompanies and society and to increase
corporate value. Both sides perform

Principally, ESG evaluations for sovereign investment are integrated

ESG classiﬁcation

Portfolio managers

company, give comprehensive consideration to ESG factors, liquidity, andcompanies to address ESG issues.

Waste management, etc.

Society S

Governance G

Human Capital

Average life expectancy, income distribution, etc.

Safety & Responsibility

Global Peace Index, etc.

Behavior

Ease of doing business

Structure

Quality of regulations, legal system, etc.

Stability & JusticePrevention of corruption, government eﬃciency, etc.

High correlation between ESG score and credit ratings

Although the sovereign ESG score is based on quantitative data, if

on engagement cooperating with relevant departments.

an incident occurs that cannot be grasped quantitatively (such as

Change investment decisions depending on the status of initiatives to addresscases where it takes time to reflect data), we use qualitative

ESG issues in investee companies.

evaluation and spread evaluation.

Air quality, air pollution, etc.

Internet availability, etc.

high credit rating.

For securities with low ESG scores, portfolio managers and credit analysts work
Portfolio managers

Pollution & Waste

rating. As a result, countries with a high ESG score tend to have a(4) Evaluate portfolio, etc.

to strengthen support, allowing

Biodiversity and habitat, water resources, etc.

Human Rights & Community

confirmed to be highly correlated with CDS spread and credit

Build portfolio

possible to add value to activities andClimate change

Natural Capitalscore is based on our ESG Materiality items, and these are

Materiality, the indices we use are limited to items that aresupply/demand, and determine the appropriate spread level for the company.

Sub-classiﬁcation of sovereign ESG score

Environmental Opportunities

institutions such as the World Bank. In addition to reflecting ESG

Based on the required spread level according to the in-house rating of theinvestee company, which makes it

Environment E

ESG materiality
Climate Change

judgment when making investment decisions. The sovereign ESG
segmented and scored using various data published by public[Take ESG factors into evaluation of spread level]

different perspectives for the sameinvestment based on the credit

Main evaluation items for our ESG Materiality and sovereign ESG scoresin-house sovereign ESG score is reflected as a quantitative

purpose is the same for both: to

ESG is taken into consideration for

Sovereign ESG score
into the same process as with corporate bond investment, and our- Set G (Governance) as the center of focus.

equity analysts work together. The

research and engagement from

Bond ESG

Bond ESG

Cases of Credit Investment

Although bondholders do not have

Reference

Disclosure of Climate-related Financial Information under TCFD

judgment. For example, when Russia invaded Ukraine in Februaryof 2022, our quantitative data could not quickly incorporate thisevent, so we also used qualitative judgment to lower scores.

Credit ratingHigh credit rating

Message from the CEOAAAAAABBBBBB-High score

CCC0

J-REIT ESG Integration
In J-REIT investment, we conduct ESG
integration utilizing ESG scoring granted

company assesses four major aspects,
which are the ESG promotion

Each item has its own checklist bywhich it is scored.

(1) Owned property
quality screening

8

10

Score

Our sovereign risk adjusted high-income bonds selection strategy is a product that has stable earnings by targeting global(4) Financial status evaluation

government bonds that have strong fiscal soundness and high expected returns, with the aim of maximizing return while minimizing(5) Other quantitative evaluation(2) Asset managementcompany s
qualitative evaluation

Strategy for
generating excess return
Portfolio decisionrisk. In our investment process, we determine the maximum investment ratio for each country using our SMTAM country risk scorethat measures financial soundness, and the sovereign ESG score is incorporated into this country risk score for ESG evaluation.
For ESG evaluations in the investment process, credit evaluations are conducted that, in particular, include whether governance

ESG evaluation

issues can result in financial deterioration in the future, which is

ESG evaluation by SMTAM(3) Individual investment
unit valuation

Sumitomo Mitsui Trust Research Institute

External ESG evaluation

Comparison of sovereign risk adjusted high-income bonds
selection strategy and reference index sovereign ESG score(Unit: Points)
9

reflected in bottom-up securities selection from the perspective of
being incorporated into the credit spread, and this is then linked toreduce downside risk. Initiatives for environmental problems by theissuing body are viewed as a factor that is reflected to medium- tolong-term creditworthiness, and we reflect this in our bottom-up

Provision of ESG evaluation
for all listed companies

securities selection. In addition, with this strategy, comprehensive

8

7

18/04

61

6

Example: ESG integration to investment products

framework and initiatives related to theenvironment, society, and governance.

4(Unit: Points)

by Sumitomo Mitsui Trust ResearchInstitute. The ESG scoring by the2evaluations of each ESG item are reflected to configure the maximum
Sovereign risk adjusted high-income bonds selection strategy

investment ratio while maintaining high ESG characteristics for index

FTSE Global Government Bond Index

comparison, which is a fund reference index, so that medium- to

19/04

20/04

21/04

22/04

23/04

long-term return can be improved while reducing downside risk.

S M T AMA M STEWARDSHIP REPORT 2023/2024

62

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Bond ESG■Recommendation on finance method

Engagement for Corporate Bonds● Initiatives for SDGs-related bonds

Principally, company ESG issues such as the inclusion of environmental response and resolution of social issues are the same forSince the issuing of SDGs-related bonds is becoming common in various industries, we continue to engage in discussions based

equity and bonds, so we also promote engagement activities for bonds based on our 12 ESG materialities. For this, we utilize

on EU taxonomy, etc., and dialogue on enhancing the use of funds and setting goals. We also focus on follow-up after investing

our strengths as a multi-asset manager, and collaborate with equity analysts and the Stewardship Development Department.

in SDGs-related bonds.

In addition to common issues, we also focus on engagement activities based on our unique approach to the bond field.

Figure 3: Relationship among SDGs-related bonds, use of funds, and ESG factors

The following will introduce some examples.

Type of bondE

Unique approach to bond field
Integration● If investment is made in

Spread bargain / Low ESG evaluation securities,
aim to improve ESG evaluation through engagement

enhancement

12 ESG materialities

Collaboration
withequity analysts

bond issuance promotion, initiatives for content

Projects that are both green and social
New or existing social projects that address or help mitigate speciﬁc social issues, or have social
beneﬁts for certain groups or for society as a whole

Social bond

Sustainability-linked bondRegardless of how funds are used, achievement of ambitious and meaningful sustainability
performance targets set in advance must be linked to bond characteristics such as the coupon

Source: SMTAM● Engagement with related parties (including securities firms, governmental● Engagement for stable bond issuance and management● Engagement for stable bond issuance and management

From the perspective of sustainable corporate activities, we believe it is important to establish a stable financing base. This

agencies, and rating agencies)

includes finding more new investors by promoting the issuance of SDGs-related bonds. For companies that require a large

Collaboration with equity analysts

Recommendation
on finance method

adaptation, conservation of natural resources, biodiversity conservation, pollution prevention, andenvironmental objectives

Sustainability bondG

Recommendation on finance method

New or existing green projects that contribute to climate change mitigation or climate change

Green bondS

● Creditworthiness evaluation to investment by considering ESG● SDGs-related

Projects that are not green projects, but increase the possibility of transition

Transition bondFigure 1: Diagram showing the relationship between SMTAM s ESG materiality and our unique approach to the bond field

Integration

Use of funds

amount of funds, we conduct engagement to spread out the issuing time and market for corporate bonds, and promote investor● Finance strategy for transition strategy

understanding by clarifying the financial strategy.

● Capital allocation● Hybrid finance■Collaboration with equity analysts■Integration
If there is a security with a bargain spread that is highly

Figure 2: Relationship between spread evaluationand ESG evaluation when making investment decisions
ESG evaluation Highattractive for investment, investment may be done basedＣA

Can be owned

Actively invest

Overvalued

For example, there is a case involving investment in an IT
company that has many listed group companies. Wheninvesting in corporate bonds, we recognized governanceissues included having no clear financial KPIs andshareholder returns, and conflicts of interest among
improvement such as with information disclosure related
to financial KPIs and investment policies, but ourconfidence in their governance evaluation did not
improve based on their actions including investment andshareholder return, so in the end, we sold our held
corporate bonds.

63

Improve ESG evaluation
through engagement

Low

group companies. After dialogue at debt IR, etc., we saw
ACommon point with industry

For example, we have had the following engagement with automobile

B

Sell / Not owned

in a financial burden due to a sudden takeover orActively invest

manufacturer A.
Equity side

Collaboration/Coordination● Company growth through ESG (environmental regulations) action● Improvement of the valuation assessment (Reducing and stabilizing capital cost, etc.)● Expansion of non-financial value and exchange to financial value in the future[Bonds] Reducing downside (Engagement for stable creditworthiness)● Ability to respond financially through ESG (environmental regulations) response➡ Clearly indicating investment policies, financial discipline, and capital allocation strategy● Business/financial risk caused by delay with ESG (environmental regulations) response● Proper finance management➡ Clarifying the roadmap for electrification and risk of becoming obsolete / impairment➡ Utilization of sustainable financeSource: SMTAM

Improve ESG evaluation through engagement

It is a bargain, but the ESG evaluation is low. Effort to improve ESG evaluation through engagement.
ＣCan be owned (Possible to own but subject to sell (Not owned))
It is overvalued, but the ESG evaluation is high, so it can be owned.

D

Sell / Not owned

It is overvalued, the ESG evaluation is low, and the spread may widen (price decline)in the future, so it is subject to sell (Not owned).
Source: SMTAM

Bond side[Equity] Pursuing upside (Engagement for maximizing corporate value)

It is a bargain and has a high ESG evaluation, so active investment is likely (purchase/hold).
B

Source: SMTAM

Action on stricter environmental regulations,
medium- to long-term strategy directionality

company in collaboration with equity analysts.

SpreadDinvestment policy for the issuing entity that could result

Automobile manufacturer

amount of capital. However, this can also be considered a businesscases, we believe that more effective dialogue is possible with theBargainimprove later (Area B in Figure 2).

Figure 4: Dialogue framework with automobile manufacturer

gases, a transition strategy is an urgent issue requiring a large
opportunity for future growth and social value creation. For suchon later engagement conditions even if the ESG
evaluation is low at the time of investment but could

For companies in industries that emit a large amount of greenhouse

SMTAM s Opinion

Company Response

Future Financing

This is now a transition period toward electrification (EVs), and theFailing to comply with environmental regulatory

We discussed using ESG finance to raise needed

investment burden on the earnings/cash flow tends to increase during

standards will directly result in a sharp loss of sales

funds. For example, with green bonds, we

this phase. Shouldn t companies be required to disclose and shareability and business base. Therefore, we are now

confirmed the effectiveness of EU taxonomy issues

information with investors such as theirconsidering an electrification roadmap,

partnerships

and framework, and shared our recognition on thewith other companies, and risk of becoming obsolete

importance of working to create a sustainable/ impairment with existing assets, etc.

financing base.

discipline,

investment policy andcapital allocation strategy, and policy for improving the

profitability of existing businesses like gasoline vehicles, and accuracy?

S M T AMA M STEWARDSHIP REPORT 2023/2024

64

Message from the CEO

SMTAM Stewardship Activities

Engagement

Exercise of Voting Rights

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Global Regulation Trends
and SMTAM s Response

Global Trends Related to ESG Investment and SMTAM s Efforts

and which require either the use of an index that contributes

investment trusts, and this went into effect on the same day.

To improve product governance, we also determined ESG

As interest in ESG investment and its AUM grows, there is an

to this objective or clearly defined measures on how they will

In addition to determining the scope of ESG investment trusts,

Product Management Guidelines that incorporate global

increasing concern about investment management notachieve this objective; and Article 6 funds that do not fall

this revision also determines specific verification items for

ESG investment-related regulations, and published ourrelated to the actual practices of ESG investment, as well as

under Articles 8 or 9. This indicates that fund classification

information disclosure of publicly offered investment trusts

certification on our ESG products based on them*. In addition,

exaggerated promotions and marketing (known as

and the content required for information disclosure are seeing

related to ESG, and a development of an organizational

we completed the application process of UCITS funds thatgreenwashing). Various regulations on information disclosure,enhancement, as the regulatory requirements are getting

structure for investment trust management companies.

meet the requirements for SFDR Article 8 funds, andetc., related to ESG investment have been considered andclearer. Also, in November 2022, the European Securities andimplemented in this regard, and their contents are becoming

Markets Authority (ESMA) announced a proposal to introduce

When properly set and implemented, such regulations, etc.,

Our ESG product certification standards specify three

more complex and strict.

numerical standards for using ESG terms in fund names, and it

help asset management companies to enhance their ESG

conditions, which are that ESG investment methods be

Regulations in countries outside Japan reflect theis expected to be finalized during 2023.

1. Introduction

published our annual report in compliance with the SFDR.

investment management processes. It is also expected thatapplied, that the portfolio contains ESG characteristics

characteristics and circumstances in each country and region

these will help improve thewhich can be measured,at the time of formulation. On the other hand, regulations ininvestment so that end investors can make proper

regarding ESG is possible. Making measurability of ESG

countries including Japan tend to aim for global

investment decisions.

characteristics one of the requirements contributes toTransparencyof ESG

proper disclosure

enhancing objectivity, and this mechanism enables

harmonization, which greatly affects asset management
3. SMTAM s ESG investments and initiatives in response to regulations

monitoring and information disclosure of ESG products.

In the UK, the Financial Conduct Authority (FCA) began

As it is recognized that the impact of ESG-related risks andRegarding outsourced management, we have developed areceiving additional feedback on drafting regulations on ESG

opportunities is, though uncertain, likely to become more

system to evaluate outsourced asset management

2. Regulatory trends in different countries

investment in October 2022. Three sustainable investment

obvious over the long term and have a more significant

companies and ESG investments of their products based on

The current trend is to increase the transparency of asset

product categories are set in it (Sustainable Focus,

impact on corporate value, it is compatible with long-term

themanagement companies and investment products. In

Sustainable Improvers, and Sustainable Impact), andinvestment. Therefore, taking ESG factors into consideration

Outsourced Operations.

particular, information disclosure on ESG investment is being

beginning in June 2024, restrictions on the use of terms

when making investment decisions is expected to improve

enhanced, and fund names are becoming a clearer reflection

related to sustainability for fund names and marketing willmedium- to long-term risk return. In Japan s Stewardship(ESG product governance)of the contents of the investment products.

gradually be implemented for funds not qualifying as

Code that was revised in March 2020, consideration of● ESG product certification: approval by a General Manager

There are two basic concepts related to regulations onsustainable investment.

business in Japan, making it necessary to respond andprepare.

Guideline for handling Due Diligence, etc. forsustainability (medium- to long-term sustainability includingof the Business Planning Department, then the decision isstrengthening information disclosure: (1) Funds are classified

ESG factors) consistent with investment management

reported to the Investment and Risk Committee, and theaccording to the degree of ESG investment, that is, howstrategies

stewardship

ESG product certification status, ESG investment

important it is to consider ESG factors in the investment

responsibilities,

which makes ESG investment moremethodology application status, and ESG characteristics

decision-making process, and based on this classification, theimportant.

required content and depth of information disclosure differ; andAs an investment manager that is a signatory of the UN

was added to the definition ofand measurement method, etc., are monitored● ESG

project measurement and monitoring: ESG(2) the decision on the classification of funds, based on eachIn the US as well, the Securities and Exchange Commission

Principles for Responsible Investment (PRI), we engage in ESG

characteristics of the portfolio are measured, andregulation, is made by the asset management company itself.

(SEC) presented a draft of enhanced disclosure restrictions

investment that reflects ESG materiality based on concepts

monitored periodically by the Business Planningfor ESG investment in May 2022. It also included three

indicated in the UN Global Compact and SDGs.

Department, and then the result is reported to thecategories for sustainable investment products, which are

We have organized and strengthened our ESG investment

Investment and Risk Committee

Integration Funds, ESG-Focused Funds, and Impact Funds. In

structure even before regulations were enhanced while

addition, a proposal to revise regulations for fund names waspromoting ESG investment. In particular, we determined our

The purpose of the EU s Sustainable Finance Disclosure

65

and thatpresented; it requires funds with a name related to ESG to

ESG Investment Policy and ESG Materiality (see pages 89

contain at least 80% ESG-related assets in the portfolio.

and 90 for details) to ensure the effectiveness of our ESG

Regulation (hereinafter, SFDR) is to protect end investors,

investment governance. The Sustainability Committee

respond to the needs of investors who want sustainable(formerly Stewardship Committee) selected 12

financial products, and increase the comparability of financial

Materialities

products while preventing greenwashing. The SFDR has been

meeting, which are considered for engagement activities andin effect since March 2021. Funds are classified into three

for making decisions on the exercise of voting rights, and are

ESG

ESG product certification

ReportManagement

Application of ESG investment methodology

Measurement of ESG characteristics

Adjustments to the portfoliothat were approved by a management

categories: Article 8 funds which require investee companies

In Japan, at the end of March 2023, the Financial Services

then reflected in the in-house ESG score so that we canto have an excellent governance system in place while

Agency finalized revisions to the Comprehensive Guidelines

engage in ESG investment according to our ESG Investment

目標
promoting
E (Environmental) and S (Social) characteristics;

for Supervision of Financial Instruments Business Operators,

Policy for systematically incorporating ESG factors into our

Article 9 funds where sustainable investment is the objective

etc. (hereinafter, Supervisory Guidelines ) related to ESG

investment decisions.

Monitoring of ESG characteristics

Information disclosure of ESG characteristics* https://www.smtam.jp/fund/fundgroup/21/

S M T AMA M STEWARDSHIP REPORT 2023/2024

66

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Global Regulation Trends
and SMTAM s Response(ESG investment)

different from rule-based regulations like the Supervisory

4. Future action and expectations

management companies to engage in meaningful● ESG investment category: Sorted into three categories

Guidelines by the Financial Services Agency in Japan, it is

The contents of these regulations have recently begun to

stewardship activities, but also improve the sustainability ofaccording to the ESG Investment Policy

important for investment managers to have a robust in-housemove toward harmonization, and this is expected tothe entire investment chain.

(1) ESG investment:

ESG investment policy, to organize governance andcontinue. In 2021, the CFA Institute presented standards for

Investment promoted by utilizing direct ESG investment

structures for ensuring the effectiveness of the policy, and tovoluntary disclosure on ESG, which is just one example of a

ESG investment is an investment method where attention ismethods (ESG integration) for portfolio management asincrease transparency through information disclosure.

movement toward support for information disclosure. On thegiven to current finance that has already been materialized

well as other ESG investment methods (active

Through these activities, our aim is to deepen investorsother hand, in addition to implementing numerical criteria forand manifested by a company, as well as to future financeownership) including engagement and exercise ofunderstanding of ESG investments, improve the soundness

sustainable investment allocation and setting targets for

known as unmaterialized finance information. It is believed

voting rights, which are the core of stewardshipand reliability of capital markets, and contribute to investor

sustainability based on fund classification and fund names,that the impact of ESG investment is realized over the longactivities.

profit as well as the realization of a sustainable society. By

there is also a trend to consider implementing audits for

term, and is an essential perspective for investors making

adding the perspective of Next Generation / Better World as

disclosed data. Therefore, constant attention needs to belong-term investment. As ESG investment becomes more

Investment method where non-financial information

the time axis to the concept of Benefits for all three sides,

given to regulation-related trends.

common, the long-term investment perspective of investors

including ESG is analyzed and evaluated, and thenwhich are asset management companies, investors, andFollow-up on these regulations, strengthening information

anddirectly reflected in portfolio management.

society, we will contribute to realizing Benefits for all four

disclosure on sustainable investment, and collection ofmanagement will be shared. This sharing of the time horizonsides which lead to a better future.

relevant data will result in various costs. It is also important

between investors and corporate managers will increase

Products that incorporate proper ESG investment

to secure human resources with new skills and to develop

mutual trust between both parties, which will improve themethods into the management process and that meethuman resources internally (hiring and retention). We believe

sustainability of both investee companies and the capitalthe three requirements determined in the ESG Productthere needs to be a response from the entire investment

market as a whole. Therefore, we believe that such trust will

Management Guidelines.

chain for issues related to the sustainability of all stewardshipfinally lead to the realization of a sustainable society and an

activities including ESG investment. Such efforts have alreadyincrease in the return on investment.

(2) ESG integration:(3) ESG product:● ESG investment methodology: Seven investment methods

Benefits for all four sides

started in some areas, and consideration is also underway.

While there are a number of definitions and concepts forproper combinations according to characteristics such as

For example, in evaluating asset managers, the Government

ESG investment, since market participants already recognize

product investment purpose, investment target, andPension Investment Fund (GPIF) announced implementationthat ESG factors are material factors for formulating stockof a system that evaluates highly asset managers thatprices and corporate value, we believe it is useful andproperly fulfill stewardship responsibilities, and that ESG

necessary to consider ESG factors in investment decisions.

integration is considered an important part of the evaluation

To improve the soundness and trust of the capital market

for their investment process. The GPIF has adopted a passive

through such an understanding of ESG investment and its

investment model known as Engagement-enhanced Passive

spread, it is important to respond properly to regulations forthat focuses on stewardship. At the selection of asset

ensuring transparency. Asset management companies, needmanagers, the integrated business model that encompasses

to keep in mind that responding to ESG investment

investment process and stewardship activity policies, theregulations will be a long and arduous journey.

organization structure for implementing these, andWe are engaging with companies and multi-stakeholders by

remuneration standards are used for evaluation, and we,capital allocation through financial education support for

SMTAM, have also been appointed.

clients and by promoting ESG investment based on dialogue

A Fact-Finding Survey Report of Stewardship Activities bywith asset owners, as well as by active ownership throughInstitutional Investors, etc. commissioned by the Financial

engagement and the exercise of voting rights so that we canServices Agency was published in March 2023, and in thecontinue to help realize a sustainable society based on

Initiatives between investment managers and asset owners,s o c ia l r e t u r n s , a n d

it stated that asset owners are expected to properly evaluate

economic return at the same time.

have been determined for ESG investment, and are used ininvestment strategy
Classification

Next Generation/ Better WorldSMTAM s ESG
investment methodology

ESG
integration

3. Integrationof ESG-related information
4. Thematic investment
5. Impact investment

Activeownership

6. Engagement

ESG product

ESG investment

2. ESG positive screening

Conditions stipulated by rules

1. ESG negative screening

Investors

Society

Benefits
for allthree sides

7. Exercise of voting rights

Asset managementcompanies

67

long-term management perspective of corporate

im p r o v e c l i ent ret urns

t hro ug hwhether investment managers have proper recognition ofissues based on reports from investment managers alongwith the effectiveness of initiatives for their resolution, to

We make judgements for the applicability of ESG investment

monitor their initiatives and to reflect these results tobased on various regulations, but there are undermined

selecting investment managers and determining theirpoints and differences among these regulations. In particular,

remunerations.

to respond properly to principle-based regulations which are

We believe that such trends will not only encourage asset

S M T AMA M STEWARDSHIP REPORT 2023/2024

68

Message from the CEO

SMTAM Stewardship Activities

Engagement

Exercise of Voting Rights

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Disclosure of Climate-related Financial Information under TCFD

its establishment as a core working group member, we have continued to discuss the approach for transitioning in the

SMTAM endorsed the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) in February

is increasing globally, and the role of investors to promote company transitions over the long term is drawing attention.

2019. The following is an explanation of the measures taken by our company on climate change issues in accordancewith the recommendations.

Asia-Pacific region with other financial institutions. In this way, awareness of the importance of transitioning to a net zero society

We believe that climate change has the potential to cause the global environment to deteriorate in an irrecoverable manner inthe medium to long term, and have a significant impact on the corporate value of our investee companies over time. Based on
this, we understand the importance of working on climate change issues over the long term while also being able to respondflexibly to changes. From this broad perspective, we are bolstering various activities and information disclosure on climatechange issues as one of the biggest challenges facing the international community, while fulfilling our fiduciary duty of
maximizing the return on medium- to long-term investments and reducing downside risks of the assets entrusted by our clients.

We believe that important issues concerning the Environment, Society, and Governance(hereinafter, ESG) will affect the long-term return of assets under management entrusted
from our clients. In particular, the effects of climate change have certainly begun tomaterialize and are beginning to have an impact on the corporate value of our investee
companies. Therefore, while it is important to reduce our own greenhouse gas
emissions, we believe it is also important to evaluate the potential profit opportunities
and risks related to climate change in these investee companies. As such, we arereflecting the evaluation in investment decision processes and leveraging it in business
management.

David Semaya

Representative Director and Chairperson / Chairperson of the Board of Directors

TCFD
According to the TCFD Recommendations, companies and other organizations are suggested to consider four key elements: (1)governance, (2) strategy, (3) risk management, and (4) metrics and targets when disclosing climate change-related information. The
following is an explanation of the measures taken by SMTAM on climate change issues in accordance with the recommended
information disclosure framework.

Figure 1: Recommended core elements for climate-related financial information disclosure

Our Approach against Climate Change Issues
Climate change issues are a variety of phenomena caused by the progression of global warming, mainly attributable to humaneconomic activities. Changes in weather patterns due to global warming cause ecosystem changes and damage to food, water,

1

health, and the economy, which can adversely affect sustainable social/economic activities.
Under the Paris Agreement that came into force in November 2016, signatory nations globally agreed to hold the increase in
the global average temperature to well below 2ºC above pre-industrial levels and to pursue efforts to limit the temperature
increase to 1.5ºC above pre-industrial levels, in order to ensure global sustainability. We agreed with the purpose of the Paris
Agreement, and as a global initiative for helping to achieve its goals, in July 2021, we joined "The Net Zero Asset Managers

2

initiative (hereinafter, NZAMI) by asset management companies who have committed to achieve net zero greenhouse gas

Climate-Related
Governance

Climatechange-related
strategies

emissions from investee companies by 2050. In May 2022, we also established and announced our interim targets that should

Monitoring by the board of directors
Role of management

Climate-related risks and opportunities
Effects of climate-related risks and opportunities*
Potential effects of climate scenarios,
including the 2°
C or less scenario

Process for identifying and evaluating climate-related risks*be achieved by 2030.
At the same time, the impact of climate change issues is becoming more obvious. According to the Synthesis Report for the Sixth

3

Assessment Report announced in March 2023 by the Intergovernmental Panel on Climate Change (IPCC), the cause of global

Risk management

Process for managing climate-related risks*Integration of processes for identifying, evaluating,and managing climate-related risks
into comprehensive risk management

warming was again connected to human activities, and the importance of efforts to reduce greenhouse gas emissions over the
next 10 years in order to prevent temperature from rising more than 1.5ºC by 2100 was restated. In May 2023, we participated
as a panelist in the Net Zero Delivery Summit hosted by the City of London with other financial institutions and policymakers
throughout the world to discuss policies for achieving a net zero society. At this meeting, the main theme was acceleratingtransition by companies for achieving a net zero society, and there were active discussions on the importance of utilizing private

4

Metrics and targets

Targets for evaluating climate-related risks and opportunities*
GHG emissions under Scopes 1, 2, and 3*
Targets used to manage climate-related risks/opportunities* Items are particularly required for asset managing companies

funds and engaging with investee companies (constructive dialogue). We again recognize the high level of expectations placedon asset management companies for achieving a net zero society along with its importance. Based on this, as a responsible
investor, we are promoting effective engagement with company groups that have a significant global impact on the reduction ofgreenhouse gas emissions in order to help resolve climate change issues while also implementing standards related to theseissues in the Principles for Exercising Voting Rights.
The NZAMI, mentioned previously, is a part of the Glasgow Financial Alliance for Net Zero (hereinafter, GFANZ), which is acoalition of financial institutions that are working to achieve a net zero society. GFANZ has established a Country Chapter inJapan to spearhead the net zero transition in the Asia-Pacific region, and began operating in June 2023. Since we participated in69

S M T AMA M STEWARDSHIP REPORT 2023/2024

70

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

Climate-related governance

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Climate change-related strategies(1) Policies related to climate change(1) Common climate change risks and opportunities

As a member of the Sumitomo Mitsui Trust Group, we have established a basic policy for promoting measures on sustainability,

As average temperatures and sea levels rise, weather-related disasters including large-scale wildfires, floods, droughts, extreme

including on climate change issues, and are continuously working to improve systems for Realizing opportunities today to ensure

heat, and heavy rains are occurring more often around the world. The increase in temperature affects climate patterns over thesustainable prosperity for tomorrow as our philosophy in harmony with the Sustainability Basic Philosophy and the Sustainability

medium to long term, and there is concern that this will impact farming production and marine and fishery resources. Since

Policy of the Group. In the investment management business rules and related rules, we regulate concepts and processes forresolving these changes will require a large amount of money, there is an ongoing global debate on how such economic costs

engagement, the exercise of voting rights, and ESG investment while taking climate change issues into consideration.

will be borne. Thus, climate change issues are increasingly recognized as a serious risk to social and economic activities all over
the world.
Based on recommendations by the TCFD, transition risks are defined as changes in climate change policies, changes in financial(2) Governance related to climate change
We recognize climate change as risk and opportunity
factors that greatly impact SMTAM and investee companies,
and our Board of Directors performs its supervisory

Figure 2: SMTAM s climate-related governance structure
Board of Directors

Supervision

Management meeting

Execution

Board of Directors in the board of directors regulations so
Sustainability Committee

The matters to be reported to the Board of Directors(formerly, Stewardship Committee)

consist of progress on responding to climate change-related
issues, risk management, and monitoring of metrics andConsidering whether it is necessary

targets. These matters are considered and discussed at

Planning

management meetings chaired by the President together

Research
Analysis

Policy approval and results reportingthese recommendations request business entities and financial institutions to identify climate change risks and opportunities thatwill impact their business activities, and to disclose and explain the impact on business and resilience. We understand suchclimate change risks and opportunities, and utilize these in investment decisions and business management.

Figure 3: Common climate change risks and opportunities

for the exercise of voting rights

Strategic
decision

ESG monitoringand strategies related to climate change is conducted by the

Monitoring

Materiality, engagement activities, initiative activities,

responsible for promotion and implementation.

resilience. In particular, energy-saving technologies and products, renewable energy, environmentally-friendly products andto review ESG Materiality and creating a review plan
Engagement policy and activity reporting

Under this structure, administrative work on risk management

acting as a secretariat, while related departments arebusiness opportunities related to climate change, and organize them into five categories ranging from resource efficiency toservices, carbon credits, recycled products, and the like are expected to increase. Figure 3 shows an overview of this. Moreover,that more direct oversight can be carried out.

Sustainability Committee as a cross-company organization

abnormal weather. Transition risks include stricter environmental standards, obsolete existing technologies, stranded fossil fuel
These recommendations define things such as the increased demand for energy-saving technology and renewable energy as

management issues. Since 2020, issues related to climate

with executive officers responsible for each business field.

are defined as damage to social infrastructure and nature, etc., as a result of medium- to long-term climate change andassets, and risk of boycotts by consumers, while physical risks include flooding risk and drought risk.

functions on these issues as well as other importantchange have been clarified as matters to report to themarkets and social norms, and rapid transition to a low-carbon society through technical innovations, etc., while physical risks

Transition risks- Formulating the fiscal year plan
Regulatory risk

and exercise of voting rights

Stricter environmental standards
Example: Stricter emission regulations and higher carbon tax

Opportunity
More efficient resources

Energy-saving technologies/products
Example: Heat pump technology and inverter technology- Monitoring
Engagement activities, initiative activities, exercise of voting rights,
ESG products, and ESG score

Technological risk

Obsolescence of existing technology
Example: Prohibiting sales of gasoline vehicles

Renewable energy
Energy shift

Example: Solar power, wind power, hydrogen power,
and biomass power generation(3) Remuneration for executives

Market risk

Shift of fossil fuel assets into stranded assets
Example: Oil, coal, and natural gas

At SMTAM, evaluation methods for remuneration of the CEO and Named Executive Officers have been determined by the Compensation
Committee comprised mainly of external directors. One KPI in the evaluation method includes the reduction of greenhouse gas emissions
in our portfolio. For example, the level of achievement for climate-related KPIs is reflected at a certain rate in the long-term incentive

Expansion of environmentally-friendly products and services
Products/services

Reputational risk

Example: Exclusion from ultimate consumers and supply chain

remunerations of CEOs. The methods to evaluate the remunerations of other Named Executive Officers are similar to CEOs.

Carbon credit, etc.

Physical risks

Financial market

Example: Stoppage of equipment and social infrastructure,and increased restoration costs

Chronic risk

Example: J Credits, Non-Fossil Fuel Certificates,
and Renewable Energy Certificates

Flood risk, etc.
Acute risk

71

Example: Electric and fuel cell vehicles,
zero-emission buildings/houses

Risk of boycotts by consumers

Recycled products, etc.
Resilience

Example: Carbon dioxide capture and utilization (CCU)
and battery reuse/recycling

Drought risk, etc.
Example: Damage to crops and wildfires

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Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

(2) Approach to climate change-related risks and opportunities for SMTAM

B. Climate change opportunities

This section will explain climate change risks and opportunities that we have identified as well as their impact on Company

We view climate change opportunities as opportunities to fulfill our fiduciary duty, and that taking advantage of these to implement

management.

strategies can help to expand the Company s assets under management, and improve business continuity and viability.

A. Climate change riskschange risks to business growth, which are engagement, exercise of voting rights, enhancement of investment decisions andWe have identified six items related to improving SMTAM s response to climate change as opportunities to convert climate

First, we believe that it is necessary to properly control climate change risks in order to fulfill our fiduciary duty. Risks for financial
institutions are generally categorized into areas such as market risk, credit risk, liquidity risk, and operational risk. Rather thanadding it as a new risk category, we have positioned climate change risks as a risk driver that can raise or lower the risks inexisting risk categories as a result of climate change.
Next, we recognize how climate change risks impact our business management through three routes, which are damage to thevalue of assets under management, loss of entrusted assets and of newly entrusted opportunities, and loss of business
continuity, all of which can ultimately worsen our finances and lower our viability as a company.
Figure 4 shows a list of the climate change risks that we have identified, their assumed impact on management, and when they
are expected to appear according to risk category. Main market risks are expected to be a failure of investee companies tohandle transition risks and physical risks, which can greatly damage corporate value and significantly reduce our assets undermanagement. Main reputational risks include existing clients no longer choosing us due to our failure to properly handle climatechange risks, and difficulty in acquiring personnel and increasing turnover due to insufficient responses to climate-related risks.
Operational risks include an increase in compliance risks due to a delay with system response such as disclosure ofclimate-related information, damage to servers and lines due to increased wind/water damage, and decreased employee safety.
Finally, credit risk is assumed to be a drawdown of overall financial markets resulting in a sudden loss of assets undermanagement when credit risks for companies and markets increase when transition risks and physical risks become manifest.
We have positioned these risks according to their impact on our business management. Those that impact finance such as
periodic profit and loss are classified as medium, and those that may have a major impact on our viability as a company areclassified as major. As for the time axis of their manifestation, although there are differences with each risk factor, risk factors

investment strategies, enhancement of product lineups, and strengthening of information dissemination. For example, regarding
engagement, in addition to engagement with investee companies, we engage in dialogue with diverse stakeholders, including
governmental agencies, industry groups, NGOs, and universities, referred to as multi-engagement. As for exercise of voting rights,
there is a measure to strengthen guidelines related to climate change issues in our Principles for Exercising Voting Rights. In thisway, we encourage companies to change their behavior toward decarbonization in order to maintain and increase assets undermanagement while reducing climate change risks. Through enhancement of investment decisions and investment strategies, andenhancement of product lineups, we will reflect climate change factors based on the style of individual funds, and provide newinvestment opportunities related to climate change for meeting the investment needs in the climate change field for existing andpotential clients. We expect that we will be able to maintain/increase the balance under management while minimizing loss ofopportunities. We also believe that strengthening information dissemination can help raise awareness of climate change issues forexisting and potential clients, and that improving SMTAM s evaluations will help expand our client base.
There are two items we view as opportunities from a broad perspective that are essential for acquiring such growth
opportunities. One is enhancement of our climate-related organizational structure, and another is strengthening engagement withthe value chain. As specific actions to strengthen our climate-related organizational structure, we have been making efforts toestablish a system that can appropriately respond to standards and regulations on climate-related information disclosure such as
those of the TCFD and SFDR, and to advance our human capital management by recruiting and developing the necessary
personnel, while improving our ability to execute business. As specific actions to strengthen engagement with the value chain, we
have begun engaging in dialogue with data vendors and index vendors that handle ESG data in order to maintain and improve thequality of climate-related data. Figure 5 gives an overview of these opportunities.

related to transition risks are expected to last approximately 10 years from now (short/medium term), whereas risk factors
related to physical risks are expected to last around 10 to 30 years (medium/long term).
Figure 5: Climate change opportunities for SMTAM
Opportunity

Figure 4: Climate change risks for SMTAM
Risk categoryMarket risk

Reputational risk
(Strategic risk)

Operational risk

Credit risk

73

Specific risk factor

Impact*2

Time axis*3

Damage to value of investee companies due to insufficient response to transition risks

Transition

Major

Short/medium term

Damage to value of investee companies due to insufficient responseto physical risks resulting in loss of business assets

Physical

Major

Medium/long term

Lower profitability due to complex and diverse climate-related data and indices,
and increased costs

Transition

MediumShort/medium term

Loss of existing clients due to the Company s improper response to climate-related risk*1

Transition

Major

Short/medium term

Missed opportunities to acquire new clients due to the Company s improper response
to climate-related risk

Transition

MediumShort/medium term

Difficulty in acquiring personnel and increased turnover due
to the Company s insufficient response to climate-related risk

Transition

Major

Short/medium term

Compliance risk (wash) due to the Company s failure to comply with regulations

Transition

Major

Short/medium term

Lack of personnel and resources due to advancement of climate-related response

Transition

MediumShort/medium term

Decreased business continuity of business partners and vendors

Transition / PhysicalMediumMedium/long term

Damage to servers and lines, and decreased employee safety

Physical

Major

Medium/long term

Drawdown of financial markets due to increased credit risk with companies
and markets as a result of climate change issues

Transition / Physical

Major

Medium/long term

Decreased viability due to lowering of Company credit as a result of climate change issues(Loss of existing clients and missed opportunities to acquire new clients)

Transition

Major

Short/medium term

Strategy (Action)

Example (Action)

Engagement

Engagement with investee companies- Focus on companies with high greenhouse gas emissions- Horizontal development of best practices- Increasing the frequency of adoption as an agenda

Engagement

Engagement with government agencies,
industry groups, NGOs, academia, etc.

- (Investee company) Indirectly promoting changes to Company behavior- Improving SMTAM value by acquiring and using the latest information

Exercise of voting rights

Strengthening guidelines related to climate change issues in our Principles
for Exercising Voting Rights- Reflecting global trends and knowledge

Enhancementof investment decisions
and investment strategies- Reflecting climate change factors according to the individual fund style- Taking climate change factors into account in investment decisions
on individual securities- ESG monitoring (fund governance)- Expansion of target assets

Product lineup enhancement

Supporting actions to address climate change issues
by providing investment opportunities- Developing indices that contribute to climate change issues- Developing management products that contribute to climate change issues

Strengthening information
dissemination

Enhancing awareness of climate change issues by clients,
and approaching potential investors- Public dissemination and discovering investors

The following are considered to be essential items for acquiring a growth base and opportunities as a broad definition, opportunities.
Enhancementof SMTAM's organizational structure
for responding to climate change- Proper actions to address climate-related regulations- Enhancement of human resource development
and resources for responding to climate change(strengthening retention, maintaining creditworthiness)- Responding to disclosure regulations such as SFDR
- Investment in employees (Human capital)

Engagement

Engagement with the value chain- Engaging in dialogue for maintaining and improving data vendor
and index vendor viability and quality,and for improving response to climate change issues*1 Gaps in SMTAM s product lineup, obsolete investment decisions and strategies, improper response to regulations on information disclosure, etc.
*2 Major: Impact assumed on SMTAM s viability, Medium: Impact assumed on SMTAM s finances.
*3 Short to medium term: Assumed to be 10 years from now, Medium to long term: Assumed to be 10 to 30 years from now.

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Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement(3) Strategy

ESG Integration

Disclosure of Climate-related Financial Information under TCFD

Referencecompanies from the investment universe. Rather, through engagement and the proper exercise of voting rights, our aim is toencourage investee companies to promote realistic solutions for addressing climate change including transition, and to achieve

Figure 6: SMTAM s strategy on climate change issues based on risks and opportunities
Strategy

Engagement with investee companies

Targetsustainable growth and sustainability for companies and society as a whole. As for B. Engagement with stakeholders, targets
include government agencies, industry groups, NGOs, and academic institutions, and our aim is to be a bridge with investee

Actions

companies while indirectly encouraging them to change their behavior. Also, regarding C. Engagement with the value chain, targets

Investee company- Promotion of top-down engagement for companies
with high greenhouse gas emissions- Horizontal development of best practices for investee companies- Proactively use it as an agenda for bottom-up engagement

Governments, industry groups, NGOs,
academia, etc.

- Engaging in dialogue with the Ministry of Economy,
Trade and Industry to implement a carbon pricing system- Engaging in dialogue with the Ministry of the Environment
to promote decarbonization(Explaining requests by companies and awareness of issues)- Exchange of opinions with the Central Research Institute of Electric Power Industry- Providing feedback on the Consultation Report Financing the Managed Phaseoutof Coal-Fired Power Plants in Asia Pacific by GFANZ

include data vendors and index vendors, and our aim is to enhance the sustainability of collaborative relationships with them andenhance responses to climate change issues through collaboration.
Regarding investment considerations, climate change factors are reflected in accordance with the individual fund style, and climate

Engagementwith various stakeholders
including governments

Strengthening guidelines related
to climate change issues in our Principles
for Exercising Voting Rights

Investee company

change factors are considered when making investment decisions for individual securities. Recently, we have enhanced fundgovernance by ESG monitoring including climate change issues, and have promoted expansion of target assets with climate change
factors considered.
Providing clients with investment opportunities is for providing investment products, while Engagement with clients is forproviding diverse information to clients. Providing investment opportunities means setting an investment strategy in considerationof climate change issues, and having the clients use related investment products for contributing to reduction of greenhouse gas- Having implemented specific standards on climate change issues
and already had a record of approval for shareholder proposals

emissions. Engagement means having future or potential investors deepen their knowledge of climate change issues throughinformation dissemination by means of online articles, and helping them see that they can help resolve such issues throughReflecting climate change factors according
to individual fund styles,
and taking climate change factors
into account in investment decisions
on individual securities

SMTAM (Clients)

Supporting actions
to address climate change issues
by providing investment opportunities

Clients- ESG monitoring results for each fund are reported quarterly at in-house meetings- In addition to equity, climate change factors are also considered
for investment in corporate bonds and J-REIT

investment.
Finally, Enhancing SMTAM s response to climate change is the foundation of our growth, and we believe it to be an important
Strategy for obtaining a foundation for growth. In recent years, we have disclosed information on climate-related risks inaccordance with SFDR disclosure regulations, and prior to that, we were already performing TCFD information disclosure. We- Setting S&P/JPX Carbon Efficient Index-tracked type strategy (Japanese equity)- Setting Bloomberg MSCI Global Aggregate Sustainability A+ Strategy (Global bonds)

believe that it is very important for us to be recognized as an asset management company and to be sustainable. At the sametime, improving personnel development and resources for climate-related response is essential for the continued existence of ourcompany, and we have been providing various types of in-house education and workshops.

Enhancing awarenessof climate change issues by clients,
and approaching potential investors

Clients (Including potential clients)- Publishing online articles- Promoting onsite financial lectures- Providing content to Nikkei MOOK Datsutanso Toshi Nyumon[Introduction to Decarbonization Investment] (in Japanese)- Engaging in dialogue with asset owners as a member of NZAMI advisory group

The following are considered to be essential items for acquiring a growth base and opportunities as a broad definition, strategies.
Proper response
to climate-related regulations

SMTAM

Improving personnel development
and resources
for climate-related response

SMTAM

Risk management
We evaluate risks for portfolios*4 related to climate change by asset class, and then integrate asset classes to evaluate held assets.

- Disclosing information on climate-related risks based on SFDR disclosure regulations- Disclosing information based on TCFD

Our assessment method involves using (1) fixed point analysis based on the disclosed information of companies that make up our
portfolio, along with their performance figures, (2) transition pathway analysis based on future climate change-related scenarios,and (3) portfolio resilience analysis related to climate change. The following is a summarized disclosure of analysis results related- Employees taking classes at the PRI Academy- Providing in-house e-learning- Holding in-house workshops on TCFD disclosure

to Japanese and foreign equity as well as Japanese and foreign bonds managed by SMTAM. The analysis was carried out using thedata and analysis methods of an outside organization*5. (The base date is June 30, 2023.)

Engagement with the value chain

Data vendors
Index vendors, etc.

- Engaging in dialogue with Bloomberg to improve ESG data
- Engaging in dialogue with ISS to clarify guidelines for the exercise
of voting rights related to climate change and voting recommendations- Engaging in dialogue with MSCI to change the calculation process for ESG scores- Engaging in dialogue with S&P to enhance climate change information disclosure via
the Carbon Efficient Index(1) Fixed point analysis (Greenhouse gas emissions, etc.)
This is an attempt to ascertain the status of greenhouse gas emission exposure and other conditions at a fixed point in time, basedon investee company disclosure data and other information. For example, when looking at the greenhouse gas emissions by asset
class (targets are Japanese equity, Japanese bonds, foreign equity, and foreign bonds), the GHG emissions based on Scope 1+2 ofeach asset are below the reference index. In addition, compared to the previous year*6, although the greenhouse gas emissions
from Japanese equity increased, there was a greater reduction in Japanese bonds and foreign equity, so the greenhouse gas

We have demonstrated our specific strategies as shown above according to Approach to climate change-related risks andemissions from the overall portfolio was 20.9 million tCO₂e (21.3 million tCO₂e the previous year), which was a decrease from theopportunities for SMTAM. These are sorted into six items, which are Engagement,

Investment

previous year. On the other hand, while GHG emissions were below the reference index for all asset classes for Scope 3, when

Engagement with clients, and Enhancing SMTAM s responsecompared to the previous year, with the exception of domestic fixed bonds, it increased for three asset classes. Therefore, theconsiderations,

Providing clients with investment opportunities,

Exercise of voting rights

to climate change.

overall portfolio increased significantly to 197.0 million tCO₂e (171.2 million tCO₂e the previous year). Looking at the reason, theThe targets of engagement are A. Investee companies, B. Government agencies and other stakeholders, and C. the Value chain.

greatest increase was with Japanese equity because some companies expanded the measurement range for emissions compared

Among these, for A. Investee companies, we encourage investee companies to change their behavior by promoting top-down

to the previous year resulting in a sudden increase in Scope 3 emissions, so it is assumed that changes in the measurement range

engagement and the horizontal implementation of best practices, especially for companies with high greenhouse gas emissions

resulted in a temporary increase. Emissions according to industry showed the same tendencies as the previous year where the(hereinafter, high-emission companies), and by proactively using this approach as an agenda for bottom-up engagement. As forutilities sector and materials sector made up the largest amount for all asset classes.

exercise of voting rights, in order to enhance connectivity, especially if the guidelines in our Principles for Exercising Voting Rights
are not being met and there is no legitimate reason, we would principally vote against proposals for electing directors forhigh-emission companies. Moreover, we will not simply withdraw from investment (divestment) to exclude high-emission

75

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Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

Figure 7: Greenhouse gas emissions by asset class*7*9*10

Japanese
equityJapanesebonds

Portfolio (2023)

11.8

Reference index (2023)

12.8

Portfolio (2022)

11.3

Reference index (2022)

12.3

Portfolio (2023)

4.3

Foreignequity6.9

Portfolio (2022)

5.2

Portfolio (2023)

7.6

Reference index (2023)

7.8

Portfolio (2022)

8.1

Reference index (2022)

8.4

Overall
portfolio

shareholding ratio of companies' equity in the utilities and materials sectors, which have higher carbon intensity, is relatively high

1.6

compared to other asset classes.

3.1

58.4
58.6
51.9

(2) Transition pathway analysis

52.4

0.6
0.6

Reference index (2022)

the reference index for all asset classes. Also, compared to the previous year*6, improvement was seen for asset classes with thecarbon intensity. In addition, the value of foreign equity is also higher than other asset classes, and it is believed that the

2.5

0.3

Portfolio (2022)

On the other hand, as with the previous year, the weighted average carbon intensity (WACI, emission per sales unit) is below

asset classes is that there is a high composition ratio from the utilities sector including power companies, which have a higher

119.7

0.3

Reference index (2023)

Reference

Disclosure of Climate-related Financial Information under TCFD

exception of Japanese bonds, and for the overall portfolio. The reason that the value of Japanese bonds is higher than other

140.0
112.9

8.5

Portfolio (2023)
Foreign
bonds

132.7

1.3

Reference index (2023)
Reference index (2022)(Unit: Million tCO₂e)

ESG Integration

Portfolio (2023)

20.9

Portfolio (2022)

21.3

Scope 1+2 (Million tCO₂e)

1.7

Scope 3 (Million tCO₂e)

3.6

A. Comparison of the expected pathway for portfolio greenhouse gas emissions and carbon budgets for each climate change scenario

1.3
3.1

Figure 10: Expected transition pathway for each investment strategy*10*11

197.0
171.2

0

50

100

150

Passive Investment Strategy

200

120%
100%

Figure 8: Industry breakdown of greenhouse gas emissions*8*10

2042

2043

2044

2042

2043

2044

2050

2041
2041

2050

2040
2040

2049

2039
2039

2049

2038
2038

2048

2037
2037

2048

2036
2036

2047

2035
2035

2047

2034
2034

2046

2033
2033

2046

2032
2032

2045

2031
2031

2045

2030
2030

2023

Foreign bonds

2029

20%

2029

Foreign equity

2028

40%

2027

Japanese bonds

2026

60%

2025

Japanese equity

2024

80%

Overall portfolio
0％10％
Utilities

20％

Materials

30％

Information technology

40％
Industrials

50％
Financials

60％
Energy70％
Consumer staples

80％

90％

Consumer discretionary

100％
Other

Active Investment Strategy
120%
100%
80%

Figure 9: Weighted average carbon intensity (WACI, emission per sales unit) by asset class *8*9*10
Portfolio (2023)

84.9

Reference index (2023)

88.5

Portfolio (2022)

93.5

Reference index (2022)

95.5

40%
20%

Portfolio (2023)

Foreignequity439.3

Portfolio (2023)

138.5

Reference index (2023)

142.1

Stated Policy Scenario (STEPS)

68.0

Reference index (2023)

170.9

Portfolio (2022)

Here, a method called transition pathway analysis is used to assess how the portfolio s climate change risks will change in the

77.2

Reference index (2022)

face of different scenarios for future climate change. Specifically, future estimated values for greenhouse gas emissions from the

197.5

Portfolio (2023)

portfolio are compared to the carbon budgets of the climate change scenarios, and the portfolio s consistency with these

112.2

Portfolio (2022)

scenarios is assessed. The scenarios used were the three scenarios of the International Energy Agency (IEA), which are the SDS:

137.0

0

77

Announced Pledges Scenario (APS)

187.3

Portfolio (2023)

Overall
portfolio

Sustainable Development Scenario (SDS)

180.7

Portfolio (2022)
Reference index (2022)

Foreignbonds

Portfolio

2028

Reference index (2022)

2027

201.1

2026

472.4

Portfolio (2022)

2025

224.4

Reference index (2023)

2024

Japanese
bonds

60%

2023

Japanese
equity(Unit: tCO₂e / $US 1 million)

100

200

300

400

500

Sustainable Development Scenario,

APS: Announced Pledges Scenario, and STEPS: Stated Policy Scenario.

S M T AAM
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Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

Figure 11: Scenarios used for analysis

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Figure 13: Temperature score by asset class*10*11

SDS

APS

STEPS

Sustainable Development Scenario

Announced Pledges Scenario

Stated Policy Scenario

Normative scenario in harmony with

Exploratory scenario where ambitious

Exploratory scenario for achieving theinitiatives to keep the temperaturetargets (NDC) set by each government

goals stated by governments (end of

below +2ºC and +1.5ºC as stipulated

are met (end of this century +2.1ºC).

this century +2.6ºC).

1.8

Japanese equity

in the Paris Agreement.

(Unit: ºC)

1.9
2.0

Japanese bonds

2.8
2.8

Foreign equity

2.9

Source: World Energy Outlook 2022

2.7

Foreign bonds

First, it was confirmed that SMTAM portfolio emissions would likely reach the upper limit of the SDS scenario by 2038 with the
Passive Investment Strategy and by 2042 with the Active Investment Strategy. However, compared to the previous year*6, the

3.0
2.1

Overall portfolio

time to reach the upper limit was postponed by two years with the Passive Investment Strategy (2036 the previous year) and by

1.5

about 6 years for the Active Investment Strategy (2036 the previous year), so there was some improvement. The Active

2023

2.4
2.0

2.5

2022

3.0

Investment Strategy has a lower holding ratio in the energy sector, which is expected to greatly exceed the carbon budget, andis a possible reason why the acceptable level comes later than with the Passive Investment Strategy.
B. Survey on climate-related targets
We confirmed that there are a certain number of

Figure 12: Survey results on climate-related targets by asset class*10(Unit: %)investee companies in our portfolio that are notaggressively addressing climate change issues. We
consider increasing the number of investee
companies that can set ambitious goals, commit to
SBT, and obtain certification*12 to be an importantmeasure, and we will actively work with investee

Approved
SBT

Committed
SBT

companies. When looking at the composition ratioof companies with SBT certification by asset
class compared to the previous year , domestic*6

Ambitious
Targetassets increased to 37% (31% the previous year)
and foreign assets increased to 38% (33% theprevious year). On the other hand, theNon-Ambitious
Targetcomposition ratio of No Target decreased to18% (23% the previous year) for domestic assets,
and to 11% (15% the previous year) for foreign
assets, which was recognized as a considerable
achievement. We will continue to make such

No Target

Japanese assets

37

31

Foreign assets

38

33

Overall portfolio(3) Portfolio resilience analysis related to climate change

38

32

A. Transition risk analysis(a) Portfolio power generation mix analysis
One index for evaluating portfolio transition risk is the power generation mix ratio of the portfolio based on the amount ofJapanese assets
Foreign assets

power generation. Here, the power generation mix ratio is compared for each asset class and reference index. Additionally, theOverall portfolio

power generation mix ratio was estimated for the overall portfolio for 2030 and 2050 under the SDS scenario. Figure 14 shows

Japanese assets

an overview of these values. Based on this, the power generation mix ratio for each asset class is nearly the same as theForeign assets

reference index. Additionally, as of now, about 2/3 of the overall portfolio is based on fossil fuels, which shows the need toOverall portfolio

reduce the fossil fuel composition ratio to about 1/3 in 2030, and to reduce it to 7% for 2050.

Japanese assets
Foreign assets
Overall portfolio
18

Japanese assets

11

Foreign assets
Overall portfolio
0

5

10

15
14

15

Figure 14: Power generation mix ratio by asset class*9*10

2023

23

2022
19

20

Japanese equity
25

30

35

Portfolio

83.9

5.3

10.8

Reference index

84.0

5.1

11.0

40

efforts so that this trend continues in the future.
C. Temperature score analysis
The temperature score index expresses how consistent the future estimated value of the portfolio greenhouse gas emissions isJapanese bonds

Foreign equity

with the carbon budget for achieving the SDS scenario by converting it to a rise in temperature. For example, with a portfolio
consistent with the SDS scenario in 2050, it will be 1.5ºC. Looking at the temperature score for each asset class compared tothe previous year, Japanese equity was 1.8ºC (1.9ºC the previous year), and Japanese bonds were 2.0ºC (2.8ºC the previousyear), foreign equity was 2.8ºC (2.9ºC the previous year), and foreign bonds were 2.7ºC (3.0ºC the previous year), and theoverall portfolio was 2.1ºC (2.4ºC the previous year). Although the result for the overall portfolio shows a temperature rise
exceeding 1.5ºC, compared to the previous year, the score itself is getting closer to 1.5ºC. This indicates that consistency with
the SDS scenario has improved.

(Unit: %)Foreign bonds

84.0

Portfolio
Reference index

4.5

81.5

11.5

6.2

12.3

Portfolio

52.6

25.0

22.4

Reference index

53.0

24.6

22.4

Portfolio

42.0

27.6

30.4

Reference index

41.2

28.7

30.2

Overall portfolio

66.8

Power generation mix ratio under the SDS scenario in 2030

37.0
7.0

Power generation mix ratio under the SDS scenario in 2050
0

15.8
10.0

53.0

9.0
10

Fossil fuel

17.4

84.0
20

30

Nuclear power

40

50

60

70

80

90

100

Renewable energy*The total composition ratio may not be 100% depending on the way fractions are handled.

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80

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

Figure 17: Physical VaR by asset class*9*10(b) Portfolio transition VaR analysis
Another transition risk evaluation indicator is called transition value at risk (hereinafter, VaR). Transition VaR is an indicator thatconverts the impact on investee companies to portfolio value based on the Net Zero Emission (NZE) Scenario announced by the(Unit: %)Japanese equity

Japanese bonds

Foreign equity

Foreign bonds

Overall portfolio

International Energy Agency (IEA). When comparing each asset class and reference index using this indicator, as shown in Figure

Portfolio (A)

2

3

1

1

1

15, the amount of transition risk for SMTAM with each asset class is equivalent to the reference index or lower. Japanese bonds

Reference index (B)

2

4

1

1

-

and foreign bonds in particular have a very narrow risk range. Additionally, it was determined that the transition risk amount for

Difference (A-B)

0

-1

0

0

-

the overall portfolio is 9%.

Figure 18 shows the composition ratio of overall portfolio physical VaR by sector, and as can be seen, about half is comprised of
Figure 15: Transition VaR by asset class*9*10

Japanese equity(Unit: %)Japanese bonds

Foreign equity

Foreign bonds

Overall portfolio

Portfolio (A)

12

19

5

2

9

Reference index (B)

12

32

5

6

-

0

-13

0

-4

-

Difference (A-B)

the industrials and consumer discretionary sectors. It can be seen that our portfolio is designed in such a way that it is strongly
impacted by these two sectors.

Figure 18: Sectoral composition ratio of physical VaR by asset class*10(Unit: %)Japanese equity

Figure 16 shows the composition ratio of overall portfolio transition VaR by sector, and as can be seen, over half is comprised of
the Materials and Industrials sectors. Since a high carbon price is introduced with the NZE Scenario, companies that have highJapanese bonds

emissions face a heavy burden, and this is believed to impact the corporate value of investee companies. As for transition risk, it
can be seen that our portfolio is designed in such a way that it is strongly impacted by these two sectors.

Foreign equity

Foreign bonds

Figure 16: Sectoral composition ratio of transition VaR by asset class*10(Unit: %)Overall portfolio

Japanese equity

0
Japanese bonds

Foreign equity

10

20

30

Industrials

Consumer discretionary

Financials

Energy40

50

Materials

Consumer staples

60

Information technology

Real estate

70

80
Public utility

90

100

Healthcare

Communication service

Looking at the overall analysis results, to effectively reduce greenhouse gas emissions for our portfolio, Japanese equity andForeign bonds

foreign equity are important as asset classes, and utilities and materials are important as sectors, and the approach to theindustrials sector is important from the perspective of reducing transition risk. We will encourage investee companies in

Overall portfolio

prioritized target assets and sectors to enhance their initiatives related to climate change issues through our engagement and
0

10

20

30

Materials

Industrials

Public utility

Financials

EnergyConsumer staples

40

50

60

Information technology
Consumer discretionary

70
Real estate

80

90

100

Healthcare

Communication service

B. Physical risk analysis (Portfolio physical VaR analysis)
There is also a physical risk evaluation indicator called physical value at risk (hereinafter, VaR). This is an indicator that converts
the physical risk impact on investee companies to portfolio value based on the assumed scenario (a 2ºC rise in temperature)
prepared by the Intergovernmental Panel on Climate Change (IPCC). Figure 17 shows a comparison between the reference
index and the physical risk by asset class based on this indicator. As can be seen, our physical risks by asset class are the sameas the reference index or below. Additionally, physical risk for the overall portfolio is 1%, which is much lower than thetransition risk of 9%.

81

exercise of voting rights.

*4. Based on assets under management excluding domestic and foreign sovereign bonds, etc.
*5. ISS (Institutional Shareholder Services)*6. Since the values for the previous year (end of June 2022) were calculated (remeasured) using updated data such as carbon emissions, these do not match with the values in
the SS report from last year.
*7. Based on Scope 1+2+3*8. Based on Scope 1+2*9. The following are reference indices used.
Japanese equity: Tokyo Stock Price Index (TOPIX)
Japanese bonds: NOMURA-BPI Overall (Corporate bonds only)
Foreign equity: MSCI-ACWI (ex Japan)
Foreign bonds: Bloomberg Global Overall (excluding Japan) (Corporate bonds only)*10. Calculated based on SMTAM's holdings for the adjusted corporate value of each asset.
*11. All industries except the fossil fuel production industry: Scope 1+2, Fossil fuel production industry: Scope 3, Electric power: Scope 1*12. SBT (Science Based Targets). Targets for reducing greenhouse gas emissions set by companies with a target year of 5 to 15 years in the future in harmony with the standards
stipulated in the Paris Agreement. Numerical values must be aligned with the latest indicators from meteorological science. These are implemented as WMB (We Mean
Business) initiatives, and are established and carried out by WMB constituent organizations such as the World Resources Institute (WRI) and CDP. SBT certification indicatesthat goals are certified based on the above. Even after being certified, it is necessary to disclose emission amounts, the progress of measures every year, and to regularly
confirm the validity of targets. Also, SBT commitment refers to the declaration that SBTs will be set within 2 years.

S M T AAM
M STEWARDSHIP REPORT 2023/2024

82

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

Metrics and targets

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

(2) Data related to investment strategy

As a responsible institutional investor, we are promoting the reduction of greenhouse gas emissions by investee companies
through our engagement and exercise of voting rights, collaboration with stakeholders such as asset owners and governmental
agencies, improving investment strategies, and providing investment opportunities (products) to clients. In this way, we will help
our investee companies achieve net zero greenhouse gas emissions by 2050, which is our commitment*13 when joining NZAMI,
and reduce these by half compared to 2019, which is our interim target for 2030.
As for our own greenhouse gas emissions, we will also make effort under the net zero realization framework of the Group-based
CO₂ emissions (Scope 1+2) by 2030, which was set by the Sumitomo Mitsui Trust Group.

Investment
strategy

Target year

Total portfolio(Billion USD)

Portfolio /Reference index

Carbon emissions(Scope 1+2)
(tCO₂e)Total
carbonemissions(tCO₂e)Carbonintensity(tCO₂e /Million USD)

WACI
(tCO₂e /Million USD)

Temperature
score
(ºC)

Transition
VaR(%)

Physical
VaR(%)

Passiveinvestment
strategy

2023

297.5

Portfolio

19,126,271

202,049,621

120.8

113.6

2.1

9%

1%

2022

294.2

Portfolio

19,343,241

178,034,809

127.8

138.7

2.4

8%

1%

Activeinvestment
strategy

2023

24.3

Portfolio

1,754,741

15,214,855

134.9

98.7

1.9

11%

2%

2022

24.8

Portfolio

1,874,264

13,806,562

142.4

119.5

2.5

10%

2%

*13. Our interim target for 2030 is to halve the emissions compared to the levels in 2019. The emission amount is calculated based on 43 trillion yen, which is about half of thetotal operational asset balance of approximately 85 trillion yen as of the end of June 2021. The ultimate goal is to achieve net zero for all assets under management.

Description of main terms

Plans for the Future

Term

Description

Calculation formula

Under the supervision of the Board of Directors, we will continue our efforts and disclosures on climate change issues. In
addition to reduction of greenhouse gas emissions generated by investee companies through collaboration with stakeholders
such as engagement, exercise of voting rights, and policy advocacy activities, and in addition to the optimal allocation of
resources through investment strategies and investment products for responding to climate change issues, we aim to both

Portfolio GHG total emissions (Unit: CO₂ converted
Total Carbon Emissions /Financed Emissions

tons (tCO₂e))
GHG emissions for investee companies are basedΣon Scope 1+2+3.

maximize client returns on investments and contribute to climate change issues through client initiatives and enhancement of

Investment market value
Investee company s EVIC *× Investee company s GHG emissions

our organizational structures for climate-related responses. We are committed to continuing our efforts to achieve this goal.
Value that can be acquired by dividing the total

Total carbon emissions

carbon emissions by the total sales of each
Carbon Intensity

Reference

investee company in the portfolio (Unit: CO₂
converted tons (tCO₂e) per Million USD).
GHG emissions for investee companies in total

Σcarbon emissions are based on Scope 1+2.

Investment market value
Investee company s EVIC *× Investee company s sales

SMTAM s carbon emissions data list
Weighted average for carbon emissions per unit

(1) Data related to asset class
Asset class

Target year

Total portfolio(Billion USD)

2023

158.6

2022

152.3

2023

7.5

2022

9.7

2023

148.3

2022

149.6

Japanese equity

Japanese bonds

Foreign equity

2023

8.8

Foreign bonds

Overall portfolio

83

Portfolio /Reference index

Carbonemissions(Scope 1+2)
(tCO₂e)Total
carbonemissions(tCO₂e)Portfolio

11,792,794

Reference index

Carbonintensity(tCO₂e /Million USD)

WACI
(tCO₂e /Million USD)

Temperature
score
(ºC)

Transition
VaR(%)

PhysicalVaR(%)

144,469,857

100.0

84.9

1.8

12%

2%

12,762,122

152,754,621

103.1

88.5

Portfolio

11,349,818

124,249,405

100.5

93.5

Reference index

12,278,324

131,983,314

103.9

95.5

Portfolio

1,274,893

5,529,261

269.7

224.4

Reference index

2,505,642

9,427,194

474.2

472.4

Portfolio

1,622,053

6,815,285

269.7

201.1

Reference index

3,112,543

11,594,720

498.8

439.3

Portfolio

7,606,930

65,971,960

159.0

138.5

Reference index

7,781,838

66,365,578

164.0

142.1

Portfolio

8,071,511

59,929,687

180.5

180.7

Reference index

8,390,593

60,822,131

187.5

187.3

Portfolio

269,766

1,959,297

164.4

68.0

Reference index

597,294

4,162,489

187.0

170.9

Portfolio

263,7031,560,023

176.3

77.2

1.9

10%

2%

2.0

19%

3%

2.8

18%

2%

2.8

5%

1%

2.9

5%

1%

2.7

2%

1%

3.0

2%

1%

2022

9.0

649,546

3,749,770

226.2

197.5

2023

323.2

Portfolio

20,944,383

217,930,375

121.7

112.2

2.1

9%

1%

2022

320.5

Portfolio

21,307,085

192,554,400

129.0

137.0

2.4

8%

2%

Reference index

Weighted Average
Carbon Intensity(WACI)

sales of each investee company using investment
weight of each investee company (Unit: CO₂
converted tons (tCO₂e) per Million USD).

ΣInvestment market value
Portfolio market price×

Investee company s GHG emissions
Investee company s sales

GHG emissions for investee companies are based on
Scope 1+2.

* EVIC stands for Enterprise Value Including Cash and expresses corporate value including cash.
EVIC = Market capitalization (Class stocks such as common stocks and preferred stocks) + Interest-bearing debt (Book value) + Controlling stockholder equity (Book value).

S M T AMA M STEWARDSHIP REPORT 2023/2024

84

Message from the CEO

SMTAM Stewardship Activities

Exercise of Voting Rights

Engagement

Corporate Profile

Reference

Disclosure of Climate-related Financial Information under TCFD

Responding to the Stewardship CodeBalance of assets under management

Approx.
87.7 trillion yen

ESG Integration

As of the end of June 2023

At SMTAM, we are addressing the principles of the Stewardship Code via the initiatives described in the tablebelow. And, moving forward, we will continue to fulfill our stewardship responsibilities.

Investment advisor business: Approx. 73.0 trillion yen
Investment trust business: Approx. 14.7 trillion yen

Initiatives and self-assessment
By asset class (Unit: Trillion yen)
Other

Japanese
equityInvestment
trust

Other

Approx.
87.7 trillion yen

16.6

Government
fund

6.9
3.9

Approx.
87.7 trillion yen

Corporate
pensionForeignequityPolicy formulation

Principle 2
73.0
Institutional
investor- We are trusted with a large amount of long-term funds forrespectively, of the balance of assets under management, andsavings, including pension funds and investment trusts. We

we are actively promoting engagement activities for ourbelieve that ESG investment from a long-term perspective

investee companies. We are also working on ESG integration

meets the needs of many clients.
- Most of our clients are in Japan, but foreign clients in the
Middle East and Europe have been increasing in recent years.

Conflict of interest

As of the end of June 2023

Stewardship activities [Number of meetings per year] From July 2022 to June 2023

Number of Japanese companies: Approx. 2,500

Stewardship Code>>, which was published on March 24, 2020. Sumitomo Mitsui Trust

Company website:

Asset Management has formulated and published a Policy for Addressing the Principles of

https://www.smtam.jp/com

the Japan s Stewardship Code. We will review our response from time to time when wepany/policy/stewardship/

deem it necessary.

As the asset management company of the Sumitomo Mitsui Trust Group, we have put inplace an essential conﬂict of interest management system. We have disclosed summaries
as needed of the deliberations of the Stewardship Activities Advisory Committee, which ismanagement

composed mostly of independent members. We will review this when necessary, as the

Principle 3- Engagement activities were promoted by means of a top-down approach according to the

Accurate
understanding

Dialoguewith companies

This reportp. 12

environment changes.

agenda based on our ESG Materiality, a market cap approach that focuses on the scale ofthe market price, and a risk approach targeting companies with a low ROE.
- In addition to trilateral cooperation among our Tokyo, London, and New York oﬃces,
collaborative engagement activities were carried out in Japan and internationally.

Principle 4

Companies where we exercise voting rights

We re-endorsed the revised Principles for Responsible Institutional Investors <<Japan s

47.6- Equity and bonds make up more than 50% and 30%,

for both equity and bonds.

Principle 1
and disclosure

14.6

22.2

Publicpension

14.7

24.6
15.2

Japanesebonds

By client type (Unit: Trillion yen)

9.1

Foreignbonds

Reference

This report
p. 8,
pp. 13-20,- We were praised for a good example in regard to our evaluation framework under ICAP
(Investor Climate Action Plan) for the second year in a row.

pp. 23-48,
p. 88- We received the top rating as an Investment manager practicing the most eﬀective
stewardship activities by an outside evaluation survey.

Number of engagement meetings: Approx. 1,300

Investment balance: Approx. 25 trillion yen
Domestic

Standards for gender diversity and cross-shareholding were added based on revisions to

Number of engaged companies: Approx. 530 companies

Principle 5

Number of foreign companies: Approx. 2,700
Investment balance: Approx. 22 trillion yen

Number of contacts with companies (Overall*): Approx. 7,100

Exercise of
voting rights

the Principles for Exercising Voting Rights (January 2023). We also disclosed our voting
records on all proposals for all brands we hold (in October 2022 and January, April, andJuly 2023). We began disclosure in CSV format starting in July 2023. While we believe that
our current response is appropriate, we will continue to revise the Principles for ExercisingThis report
pp. 53-56

Voting Rights, which serves as a minimum standard, and work to maintain and enhance thetransparency of our exercise of voting rights.

Number of engagement meetings : Approx. 390
Overseas
Number of engaged companies: Approx. 310 companies* Total number of contacts including general interviews, company briefing sessions,factory tours, and telephone conferences as well as engagements

Principle 6
Reporting to clientsand beneficiaries

We are providing explanations about our stewardship activities to asset owners

This reportperiodically or non-periodically. We found opportunities at external seminars andpp. 21-22

workshops for explaining our stewardship activities. We released our 2022/2023

And our website

Stewardship Report (October 2022). Moving forward, we will endeavor to report in a timely

https://www.smtam.jp/ﬁle/and appropriate manner and also improve and expand the content of our activity reports.

137/stewardship̲report.pdf

We acquired, shared, and deepened new knowledge through activities such as various

Principle 7
Development of skills

global initiatives and workshops. We also utilized engagement targeting government oﬃces,

This reportinstitutions, and academic institutes for gaining new knowledge. We utilized an externalp. 5,

organization (PRI Academy) and in-house e-learning to strengthen ESG knowledge. By

pp. 15-20

continuing such activities, we will enhance our ability to engage in stewardship activities.

85

S M T AAM
M STEWARDSHIP REPORT 2023/2024

86

Message from the CEO

SMTAM Stewardship Activities

Engagement

Exercise of Voting Rights

Active Involvement in the Principles for Responsible Investment (PRI),
and Maintaining/Improving Evaluations
Established with the support of the United Nations, the Principles

2021※1for Responsible Investment (PRI) encourage institutional investors

Investment & Stewardship Policy*2

to incorporate environmental, social and governance (ESG) factors

Listed equity★★★★★

into their investment decision-making processes. There were 100

Active - Quantitative / Engagement★★★★★

signatories when it launched in April 2006, and has increased

Active - Fundamental / Engagement★★★★★

greatly to 5,381 by the end of March 2023, which made theInvestment trust / Engagement★★★★★

positioning more important. In addition to becoming a signatory to

Passive / Engagement★★★★

the PRI in May 2006, we have drafted policies in accordance with

Active - Quantitative / Voting rights★★★★

the six principles and implemented initiatives in light of the latest

Active - Fundamental / Voting rights★★★★

Investment trust / Voting rights★★★★

Passive / Voting rights★★★★

developments.
PRI Assessments are evaluations done on the commitment andprogress of signatories toward the six principles of the PRI. These

Fixed income investment

are conducted according to reports made by signatories.
We carefully examine the evaluation results from this assessment andmake effort to improve items with insufficiencies, viewing these asreport (2021), there was a question related to the disclosure rate ofitems for listed equity. We originally were targeting disclosure of

One measure we took was to improve the contents of the survey on

Multiple strategies★★★★★

Long/short equity

★★★★★
★★★

Listed equity - Active★★

Fixed income - Passive★★

Fixed income - Active★★

*1. The evaluation for 2021 is the PILOT version. The oﬃcial version will beavailable starting with the evaluation for 2023.
*2. Including engagement activities.

Information Disclosure According to the ICAP (Investor Climate Action Plan) Framework
The Investor Climate Action Plan (ICAP) is a framework for carrying out self-evaluation of stewardship activities byasset management companies that was announced by The Investor Agenda in May 2021. As shown in the figure
below, the expected achievement level for engagement activities of investors is determined for four key focus areas
and governance, and it is recommended that asset management companies use ICAP for information disclosure. Since
2022, SMTAM has continued information disclosure according to this framework.
Focus areas

Expected achievement level

Goal setting

Man agi n g syst e mi c c li mat erisks in investor portfolios andenabling the transition by

Risk management

shifting capital to value-creating
Asset allocation

businesses set to succeed in a
net zero future.

Additional goal setting

Engaging companies to drive
and demonstrate real progress

Bilateral engagement

in line with a 1.5ºC future.

Lobbying activities

Engaging in dialogue with policymakers in Japan on 2030 power generation mix determined in

to a net zero economy by 2050

the Sixth Strategic Energy Plan and future prospects.

or sooner.

Advocacy

Principle 4

Principle 5

Principle 6

87

We seek appropriate disclosure of ESG issues from investee companies.

Presentation of recommendations on forest conservation to the UK Environment Minister (LordGoldsmith), which was the host country for COP26.

Information disclosure in accordance with ICAP through our Stewardship Report as a step
toward achieving net zero by 2050.
to help stakeholders track
1.5ºC pathway.

Disclosure of portfolio and benchmarks for weighted average carbon emissions (emissions per unit of sales).
Conducting evaluation of our portfolio ((1) Fixed-point analysis and (2) Transition pathway
analysis based on future climate change scenarios).
Posting of engagement example cases from inside and outside Japan through Stewardship

Evaluation of disclosure

Principle 3

for deforestation.

engagement with policymakers in Brazil and Indonesia.

investor action in line with a

We will seek appropriate disclosures on ESG issues by the entities in which we invest.

total greenhouse gas emissions. Engagement across the commodity supply chain as an initiativewith delivering a just transition

Alignment with TCFD

We conduct engagements and exercise voting rights with ESG issues in mind; through these activities, we encourage investee companies toimplement appropriate initiatives to tackle ESG challenges.

representative member of the NZAMI Advisory Committee.
Promoting eﬀective activities with about 100 companies that have a major impact on reducing

Advocating for policies aligned

Enhancing investor disclosure

Principle 2

SMT ETF Carbon Eﬃcient Index Japan Equity listed on the Tokyo Stock Exchange in 2021.
Policy of voting against proposals for election of Directors if there is no improvement after engagement.

Participation as a lead manager in the IPDD (Investors Policy Dialogue on Deforestation), andInvestor statements

Carbon emissions and portfolio evaluation

We will be active owners and incorporate ESG issues into our ownership policies and practices.

analysis based on future climate change scenarios).

(3) Policy Advocacy

In October 2023, the annual meeting of the PRI (PRI in Person) was held in Japan (Tokyo) for the first time, and we participated as a

We will incorporate ESG issues into investment analysis and decision-making processes.

Conducting evaluation of our portfolio ((1) Fixed-point analysis and (2) Transition pathway

Policy of voting against proposals for election of Directors if there is no improvement after engagement.

Corporate escalation

Commitment, purpose, and goals

With SMTAM s aim of maximizing medium- to long-term investment return to our clients (beneﬁciaries) and suppressing downside risk, we analyze and evaluate
non-ﬁnancial information including ESG, and promote initiatives that utilize knowledge acquired from this analysis and evaluation for investment (ESG integration).

emissions from investee companies by 2050, and to reach interim targets by 2030.

Appointed as lead manager for multiple companies in Climate Action 100+ and as the Asian

our regulations for approving ESG products from among outsourced management products in order to reorganize outsourced products.

Principle 1

In 2021, we joined NZAMI. We announced our eﬀorts to achieve net zero greenhouse gas(2) Corporate Engagement(4) Investor Disclosure

improve our ratings.

Company stewardship activities(1) Investment

responsible investment for outsourced asset management companies in order to raise the monitoring level. At the same time, we organizedGold Sponsor. We will continue with our active involvement in the PRI going forward and will make every effort to maintain andReference

Disclosure of Climate-related Financial Information under TCFD

Collective/Collaborative engagement

Management company selection, appointment, and monitoring (SAM)

Japanese equity, but in response to this, we added foreign equity todetermined that there was room for improving the monitoring level.

★★★★

Long/short equity / Voting rights

the scope. Regarding questions related to the selection andmonitoring of outsourced asset management companies, it was★★★★

Corporate
Hedge fund (HF)

opportunities for improving our response. For example, in the previous
individual disclosures on the exercise of voting rights in the evaluationSSA

ESG Integration

Report issued once a year.

Regarding The Investor Agenda, in July 2023, the Investor

Climate Action 100+ and as the Asian representative member

Climate Action Plan (ICAP) Expectation Ladder* was partiallyof the NZAMI Advisory Committee. Also, as an example ofrevised to enhance overall items related to deforestation. In

Policy Advocacy (investor statement), we have acknowledged

September 2023, the 4th case studies focusing on ICAP best

our participation as a lead manager in the IPDD (Investors

practices to facilitate the implementation of climate change

Policy Dialogue on Deforestation), and our engagement withmeasures by more institutional investors was announced.

policymakers in Brazil and Indonesia. Additionally, as initiatives

Our stewardship activities were introduced as best practices

related to deforestation, case studies of engagement acrossthe same as in the first one in January 2022. As shown in thethe commodity supply chain have been introduced.

By proactively promoting stewardship activities and educational activities, we help capital market participants to accept and implement
the Principles.

above table, SMTAM is conducting a self-evaluation of our

We will continue to make effort to improve and enhance thecurrent approach to risks and opportunities related to climatetransparency of our stewardship activities through information

We will work together to enhance our eﬀectiveness in implementing the Principles.

change in four focus areas, and our self-evaluations of thedisclosure by means of ICAP.

We will promote acceptance and implementation of the Principles within the asset management industry.

We collaborate with investment institutions in Japan and overseas through participation in PRI-sponsored working groups and involvement insignatory bodies established with the aim of resolving ESG issues in order to improve eﬀectiveness in implementing the Principles.

We will report on our activities and progress towards implementing the Principles.

We implement these Principles and produce and issue reports that meet the requirements for signatories to disclose their activities andprogress towards implementing them.

expectation ladder in four focus areas have continued to behighly evaluated as Tier 1 or Tier 2.
As an example ofCorporate engagement (Collective/* Concept indicating actions that should be taken according to each situation by

Collaborative engagement), achievements include being

sorting into four levels; from investors who are making eﬀort to set standards forappointed as a lead manager for multiple companies in the

climate change (Tier 4).

net-zero carbon emissions (Tier 1) to investors who are just beginning to consider

S M T AAM
M STEWARDSHIP REPORT 2023/2024

88

Message from the CEO

SMTAM Stewardship Activities

Engagement

Exercise of Voting Rights

ESG Integration

Reference

Disclosure of Climate-related Financial Information under TCFD

SMTAM s ESG Investment Policy

Ⅰ. Basic Policy
1. Purpose and signiﬁcance of ESG investment
As a signatory asset manager on the Principles for Responsible Investment, we conduct investment activities (ESG investment) focusing on medium- to long-term environmental, social, and governance(ESG) on the basis of the values presented in the United Nations Global Compact and SDGs. We believe that fulﬁlling the role as an investment manager in an investment chain through ESG
investment will make contributions in value improvement and sustainable growth in investee companies, maximizing the investment return of clients (beneﬁciaries) over a medium to long term,
reducing downside risks, and achieving a sustainable society.
The purpose of this policy is to clarify the basic policies and views in making ESG investment integrating into investment decision making while also promoting systematic ESG investment with assured
consistency and continuity.
2. Positioning
1) ESG investment refers to general investment activities as an institutional investor with a focus on challenges and investment opportunities related to the environment (E), society (S), and governance (G).
2) ESG investment is part of the effort to fulfill stewardship responsibilities as a responsible institutional investor.
3) ESG investment is promoted by utilizing direct ESG investment methods for portfolio management determined in III. ESG Investment Methodology and In-house ESG Scores, and other ESG
investment methods including engagement and exercise of voting rights, which are the core of stewardship activities.
4) ESG integration refers to actions including analyzing and evaluating non-ﬁnancial information including ESG, and utilizing knowledge acquired from this analysis and evaluation for investment tomaximize medium- to long-term investment return to our clients (beneﬁciaries) and reducing downside risk. In particular, we use ESG investment methods from 1) to 5) that are directly related toportfolio management as determined in 1. ESG investment methodology for in-house managed products of III. ESG Investment Methodology and In-house ESG Scores.
5) ESG products are products that incorporate proper ESG investment methods into the management process and that meet the requirements determined separately in related Company rules.
3. Commitment
1) We take ESG investment into consideration to the maximum extent for all products under our management.
2) We make ESG investments in order to fulﬁll our responsibility (stewardship responsibility) to increase investment return to our clients (beneﬁciaries) while carrying our proper monitoringand disclosure.
(1) ESG-related issues are non-ﬁnancial issues that do not appear in ﬁnancial information, and may have a signiﬁcant impact on business opportunities, risks, and corporate value over time.
(2) Actively investing in companies that positively address ESG-related issues and seeking best practices from companies will lead to the pursuit of a medium- to long-term investment return upside potential.
(3) Reducing investments in companies with ESG issues and correcting ESG-related issues that could damage corporate value will lead to a reduction of downside risks for investment return.
3) In making ESG investments, we take II. ESG Materiality into consideration.
4) We manage portfolios for various investment strategies, and are consistent with each client s investment purposes. For ESG investment, we use properly combined ESG investment methods
determined in III. ESG Investment Methodology and In-house ESG Scores according to characteristics such as the investment purpose, investment target, and investment strategy.
5) As an escalation measurement of ESG investment methodology, if it becomes diﬃcult to raise the ESG investment eﬀect through engagement activities with investee companies, we consider voting
against company proposals or agreeing to shareholder proposals in the relevant investee company.
6) In order to improve the eﬀect of ESG investments, we examine and try to understand the evaluation purpose, method, and restrictions for ESG evaluation and data used to allow us to perform ESG
evaluations and ESG investments for investee companies, and take necessary measures.

4. Society
Overview
As a signatory asset manager for the Principles for Responsible Investment, we must require investee companies not only to comply with internationally supported laws and regulations, but also
operate with consideration to the interests of diverse stakeholders, including clients, employees, local communities, and members of worldwide supply chains. In addition, as the population structurechanges and awareness of diversity deepens, the standards required for companies are increasing daily. In order to realize a sustainable society and ensure medium- to long-term investment returnfrom client assets, companies must always seek a high level of eﬀort.
1) Human rights and community
We consider compliance by investee companies with international rules to be a point of emphasis. In supply chains, there are risks related to neglecting the work environment and with misconduct
such as human rights infringement with workers. Therefore, we understand the initiatives such as with human rights due diligence according to international standards on labor and human rights,
and reﬂect these to ESG investments from perspectives such as Just Transition.
2) Human capitalAs the economy pushes a shift to services, ensuring excellent personnel, human resource development, and engagement with employees are becoming more important factors that determine
investee company performance. We consider the eﬀorts made by investee companies for improving value through diversity, inclusion, equality, investment in human resources, and improvement ofwell-being and motivation, and reﬂect these in our ESG investments.
3) Security and responsibility
As economic activities become more complex, including globalization of supply chains and the rapid progress of digitization, there is growing risk of tangible and intangible damage to clients andother stakeholders through products and services that are the output of corporate activities. Social responsibility of governments and companies in regards to labor and safety is increasing. We
take into account the vulnerabilities that lead to such risks and consider how investee companies respond to and reﬂect them in our ESG investments.
4) Social opportunities
Initiatives through international frameworks and government-level policies are implemented for the social issues in the above 1) to 3), so the process where economy and social disparity are
eliminated results in social opportunities. In particular, expansion to communities and people where basic services necessary for achieving SDGs such as medical services, information
communication, and ﬁnance are lacking, will lead to the creation of new markets and business models. We view this as an investment opportunity and reﬂect it in our ESG investments in order tosupport the shift to a sustainable society and achieve growth of client assets.
5. Governance
Overview
Investment return is obtained when the interests of an investment country or investment target company coincide with those of stakeholders represented by investors, and its goal is achieved.
Governance is the most basic system for this purpose, and it is necessary to consider it as a common important matter for all investee companies in order to secure investment return from client
assets over a medium to long term.
1) Behavior
Whether a company, etc., conducts management with due consideration to the interests of its stakeholders is evident in its behaviors, etc. We take into account behaviors such as capital eﬃciency andinformation disclosure and reﬂect them in our ESG investment decisions. We take care with regard to information disclosure in accordance with all ESG topics because it is the starting point of relevant action.
2) Structure
Governance should be expressed objectively in government laws and regulations and in corporate organizational structure. SMTAM considers the appropriateness of corporate governance basedon the composition of the board of directors and the diversity of directors, remuneration systems, takeover defense measures, and the composition of shareholders along with the characteristics of
the industry and country/region, and reﬂects these to ESG investments.
3) Stability and justice
For countries and companies, events can occur that have a negative impact inside and outside the organization, ranging from deliberate violations of laws and regulations, to accidents. If the way of

Ⅱ. ESG Materiality

responding to such an incident or the speed with which it is handled is not suﬃcient, in addition to disadvantages for society, the creditworthiness of the country and corporate value will be greatly
impacted. In order to deal with such risks properly, we consider political stability and fairness, a company s code of conduct, their risk management system including preventive measures, andcompany climate regarding compliance, etc., and reﬂect these to our ESG investments.

1. ESG materiality

4) Governance improvement

ESG materiality refers to ESG issues that we view as important for improving the value of the investee company and promoting sustainable growth. We consider ESG materiality when performing ESG

Governance is positioned as the core of the social and economic activities by governments and companies. Improvements and advancements with governance are what move governments andinvestment including ESG evaluation of investee companies, engagement activities, and decisions for exercise of voting rights. In addition, we have positioned ESG materiality as the basis for planning andcompanies to achieve sustainability and engage in new business opportunities. In other words, these are expected to raise return on investment. We view this as an investment opportunity andpromoting various stewardship activities, and have set it as the basis for formulating implementation plans related to engagement activities, various initiative activities, and the exercise of voting rights.

reﬂect it in our ESG investments in order to achieve growth with client assets.

With ESG, there are various issues and topics from a number of perspectives, and these diﬀer according to each external evaluation agency. Therefore, we have our own deﬁnition of ESG Materiality,
and the following 3. to 5. are the main evaluation items and contents for our ESG investment.
2. Review of ESG materiality

Ⅲ. ESG Investment Methodology and In-house ESG Scores

ESG materiality is considered based on the information acquired through dialogue with each stakeholder, and is reviewed annually.
1. ESG investment methodology for in-house investment products
3. Environment
Overview
While all economic activities depend on the natural environment, the activities by humankind after the Industrial Revolution have placed a signiﬁcant burden on the natural environment and are achallenge that threatens its sustainable prosperity. In order to achieve a sustainable society and secure medium- to long-term investment return from client assets, it is necessary to take into accountelements of the natural environment in investment activities and to support the realization of a recycling-oriented society.
1) Climate change
Global warming, which is attributable to the accumulation of greenhouse gases such as carbon dioxide, and the resulting extreme weather are not a threat in the future, but rather a reality that is in
front of us. We consider climate change as the most important issue aﬀecting society and economic activities as a whole, and reﬂect measures for mitigating and adapting to it in ESG investment
decisions by considering matters such as international frameworks.
2) Natural capital
Economic activities depend greatly on natural capital. Misuse of natural capital, which mainly include raw materials, makes it impossible to use such resources sustainably, and is also a threat to thecontinuous prosperity of society. Therefore, it is necessary not just to put a stop to their depletion, but to restore natural capital in order to maintain a sustainable society. We especially recognize
the importance of conserving forests that act as a carbon sink, which helps with biodiversity as the foundation of ecosystem services that support society and the economy, and addressing climatechange. We also understand that such issues can occur anywhere in the supply chain. We will reﬂect the status of biodiversity and the sustainable use of natural capital and resources such as
forests, water, minerals, and agriculture, forestry, and ﬁsheries into our ESG investments.
3) Pollution and waste
If various wastes generated as byproducts of economic activity are not properly managed by governments or companies, natural capital will be damaged by destruction of the environment and by

The ESG investment method for carrying out ESG investments is deﬁned in the following 1) to 7).
1) ESG negative screening
Under certain criteria, we exclude companies from our investment universe who have signiﬁcant problems from the perspective of ESG, such as those that manufacture inhumane weapons and thatconﬂict with international codes.
2) ESG positive screening
We actively invest in companies with high ESG ratings within each sector.
3) Integration of ESG-related information
We incorporate knowledge obtained from analyzing/evaluating non-ﬁnancial information including ESG into processes regarding selecting brands of each fund and building portfolios in an explicit
and systematic manner.
4) Topic investment
We establish topics regarding ESG and organize and manage funds that mainly incorporate companies related to it.
5) Impact investment
We form and manage funds with an explicit purpose of having a positive impact on society from the ESG perspective, as well as producing economic investment return.
6) Engagement
We hold constructive dialogues on ESG topics with investee companies as an opportunity to seek best practices from companies and improve their value over a medium to long term.
7) Exercise of voting rights
We call for minimum standards and value improvement in investee companies by reﬂecting ESG factors in voting for or against a proposal in the exercise of voting rights of investee companies.

pollution, and scarce resources will be consumed. We reﬂect the status of compliance with laws and regulations by governments and companies, sustainability of natural capital and resources
through waste reduction and resource circulation of product lifecycles into our ESG investments.
4) Environmental opportunities

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2. In-house ESG score
The in-house ESG score refers to SMTAM s investment evaluation indices based on ESG given from the perspective of investors by analyzing the impact of ESG issues on opportunities and risks for

The environmental issues in 1) to 3) above lead to the creation of new markets and business models as represented by renewable energy and resource circulation through the promotion of

governments and companies, etc., with the aim of maximizing medium- to long-term investment returns for clients (beneﬁciaries) while controlling downside risks.

international initiatives and policy changes at a governmental level and changes in consumer awareness. We view this as an investment opportunity and reﬂect it in our ESG investments in order toUsing ESG evaluations based on ESG materiality determined by SMTAM, we give an in-house ESG score for investment universe, etc., in order to make continuous improvement.

support the shift to a sustainable society and achieve growth of client assets.

Details related to in-house ESG score are determined separately in SMTAM s regulations, etc.

S M T AM STEWARDSHIP REPORT 2023/2024

90Inquiries

Sumitomo Mitsui Trust Asset Management Co., Ltd.
Stewardship Development Department (ss̲oﬃce̲hp@smtam.jp)
Please send any inquiries regarding this Stewardship Report to the above email address.