Nikko Asset Management Group Responseto the UK Stewardship Code 2020
For the reporting period 1st January to 31st December 2021

April 2022

Foreword
We know how important stewardship is to our clients – we hear it from themon a day-to-day basis. They have increasing expectations of what we do on theirbehalf, how we do it, and how it is reported – and rightly so. In an increasinglyinterdependent post-pandemic world, the challenges ahead of us are significant,and, as stewards of our clients’ capital, we have a duty to ensure that we areacting responsibly on their behalf. We also recognise that we have a wider role as
guardians of market integrity and a responsibility to minimise systemic risks toensure that markets continue to be run for the benefit of the whole of society.
At Nikko Asset Management we take these responsibilities very seriously and arecommitted to putting the best interests of our clients first. Fiduciary, environmental,social and governance principles are at the heart of our business and together
represent the highest guiding theme of our management philosophy. Ourinvestment beliefs have always centred on concepts such as governance andsustainable growth. Our typically long holding periods have allowed us to develop
strong relationships with many of the companies in which we invest, helping us tomake better-informed investment decisions.
As in any relationship, this is a two-way process. While we listen to what companies
tell us, we also use our voice as shareholders to encourage them to focus on material
issues such as climate change, board diversity and gender equality alongside
financial performance – and we hold ourselves to the same standards. In 2021 wemade changes to a number of stewardship related policies and position statements,
as well as making commitments to a number of diversity, inclusion and climaterelated initiatives which are detailed within this report.
We believe high standards should start at the top. As a former Chairmanof the Japan Investment Advisers Association and member of the Panel for
Vitalizing Financial and Capital Markets, which was hosted by the Japan
Financial Services Agency, I promoted the introduction of Japan’s own
Stewardship Code in 2014. I therefore fully support and commend the workof the UK Financial Reporting Council in raising the bar to promote effective
stewardship by improving the quality of disclosure, transparency andaccountability of both companies and investors.
We have made significant investments in enhancing our ESG integrationand stewardship capabilities, but we recognise that all these areas requirecontinuous improvement to match the evolving needs of our diverse clientbase. We appreciate the opportunity to share our progress with you in thisreport and trust that it evidences our strong commitment to stewardship.

Yoichiro Iwama
Outside Director and Chairman of the Board of Directors

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Contents
Principles

Page

Principle 1:

Signatories’ purpose, investment beliefs, strategy and culture enable stewardship that creates long-term value forclients and beneficiaries leading to sustainable benefits for the economy, the environment and society.

4

Principle 2:

Signatories’ governance, resources and incentives support stewardship.

10

Principle 3:

Signatories manage conflicts of interest to put the best interests of clients and beneficiaries first.

16

Principle 4:

Signatories identify and respond to market-wide and systemic risks to promote a well-functioning financial system.

19

Principle 5:

Signatories review their policies, assure their processes and assess the effectiveness of their activities.

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Principle 6:

Signatories take account of client and beneficiary needs and communicate the activities and outcomes of theirstewardship and investment to them.

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Principle 7:

Signatories systematically integrate stewardship and investment, including material environmental, social andgovernance issues, and climate change, to fulfil their responsibilities.

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Principle 8:

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

43

Principle 9:

Signatories engage with issuers to maintain or enhance the value of assets.

45

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

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

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Principle 12: Signatories actively exercise their rights and responsibilities.

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Principle 1:
Signatories’ purpose, investment beliefs, strategy and culture enablestewardship that creates long-term value for clients and beneficiaries leading
to sustainable benefits for the economy, the environment and society.

Nikko AM Group Statement of Purpose“Nikko AM, as an asset management company, acts as a fiduciary on behalf of its clients and isfirmly committed to putting its clients’ best interests first. It places fiduciary and ESG principles as
the highest guiding themes of its corporate values and actions.”
Context
With its origins in Japan, the Nikko Asset Management Group (“NAM Group”) is today one of Asia’s largest independent asset
managers, with $271.5 billion1 under management. Headquartered in Japan, which is home to a large proportion of both
our clients and our assets, we also have presence in the rest of the world, including the UK. We combine a global perspectivewith our Asian DNA to create sophisticated and diverse investment solutions to meet our clients’ needs. Japanese culture
values harmony, both with nature and with other people, putting less emphasis on the individual and more on society thanin Western traditions. We have therefore grown up over the past 60 years infused with the knowledge that we must be good
corporate citizens. Our approach to stewardship and engagement has evolved against that background and it informs theway we have addressed our response to the UK Stewardship Code.
A breakdown of our AUM by asset class, client segment and domicile is shown in the following charts.
Assets Under Management by Asset Class2

Assets Under Management by Client Domicile2

Alternatives4 5.8%

Japan
91.6%

Multi-Asset3 6.2%

Asia ex-Japan 3.0%

Money Markets
12.6%

EMEA 2.6%

Japanese
Equity45.0%
Fixed Income
10.2%

Australia/
New Zealand 2.4%
Other 0.3%
Equity65.1%

North America 0.2%

The NAM Group and its affiliates have a presence in 11 countries, with our in-house investment teams located in seven of ouroffices across four continents. We have a diverse workforce that includes 26 nationalities working together with the common
purpose of protecting and growing the assets of our customers in a way that best meets their long-term investment goals.
Together we provide high-conviction fund management from across our global network, as well as across a range of active
equity, fixed income and multi-asset strategies2 (combining both equity and fixed income assets), with our complementary
range of passive strategies covering more than 20 indices, including some of Asia’s largest exchange-traded funds (ETFs).

As of 31 December 2021. Consolidated assets under management and advice of Nikko AM, including subsidiaries but excluding minority affiliates and minority joint ventures.
Totals may not sum due to rounding of data at source.
‘Multi-Asset’ funds are made up of Equity and Fixed Income assets; the stewardship of each of these assets is addressed individually in this report.
4
‘Alternatives’ constitutes REITs, Equity Long/Short and Infrastructure funds. Infrastructure represents 0.2% of group AUM and is managed by external managers. These managers are subject
to Nikko AM’s external manager due diligence process, which includes a review of ESG policies.
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3

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Principle 1:

Locations of our Offices and Investment Teams
EDINBURGH
Global Equity
LONDON
Global Fixed Income
FRANKFURTLUXEMBOURGTOKYO – HEAD OFFICE
Japan Equity,
Fixed Income,
Alternatives, ETFs

CHINA

MALAYSIA

HONG KONG
China Equity
SYDNEYSINGAPORE
Asia Equity,
Asia Fixed Income,
China Equity,
Multi-Asset, ETFs

INVESTMENT CAPABILITIES:NEW YORK
Thematic
Equities

AUCKLANDNew Zealand Equity,
Fixed Income

Equities

Fixed Income

Multi-Asset

Alternatives

ETFs

While most of our assets under management (AUM) and clients are based in Asia, our long-term business goal is to offer bestin-class investment solutions for clients worldwide.
We implement cross border delegation arrangements whereby the locally contracted Nikko AM office manages businessdevelopment supported by local client servicing teams, with portfolio management delegated to the respective regional
Nikko AM group entity where the relevant investment expertise is based. For example, the AUM of our UK entity, accounting
for approximately 8% of Nikko AM Group AUM represents assets managed on behalf of institutional clients in the UK, Europe
and the Middle East who are accessing the investment capabilities of both our local and global investment teams, as wellas investors from across the globe accessing the expertise of our Edinburgh-based Global Equity and London-based Global
Fixed Income teams. A breakdown of the AUM of our UK entity as at 31 December 2021 is provided in the charts below:
Nikko Asset Management Europe Limited:
AUM Breakdown by Asset Class
Global Equity 17.9%

Nikko Asset Management Europe Limited:
AUM Breakdown by Client Domicile
UK 14.2%

Japanese Equity 29.2%
Money Market Funds
13.4%

Asia (ex-Japan) 10.8%
Europe (ex-UK) 3.2%
Australia/New Zealand
1.7%

Middle East 17.1%
USA 0.3%

Global Fixed Income 39.6%

Japan 52.7%

We believe in a sense of responsibility, stressing stability and harmony. We believe in promoting respect for our environment,for our community and for other people. As active owners we recognise the value of building long-term relationships built
on trust and respect for the companies in which we invest to promote better outcomes for our clients, the economy, theenvironment and society. In doing so, we strive to be better global citizens.

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Principle 1:

Code of Ethics
Below we outline our values in the context ofinvestment beliefs, culture and engagement and, within
the activity section, explain how these enable effective
stewardship. These values are encapsulated in our Codeof Ethics, which commits us to upholding:●our fiduciary duty to our clients●the integrity of capital markets●●

our responsibilities to environmental conservation,andour social responsibility.

The Code of Ethics is reviewed by the NAM
Group Board of Directors (more details of thereview process are described in Principle 5) andattested to annually by all employees globally.
It acknowledges that, as a fiduciary, we owe ourclients a duty of loyalty and care. When acting ina fiduciary capacity, all employees must act forthe benefit of our clients, placing their interests
before the interests of the NAM Group, a third
party or their own. Employees must also act withreasonable care and diligence and exercise prudent
judgement in the performance of their duties. The
code provides guidance and sets standards in a
number of specific areas, including our duties toregulators and the public, to upholding the integrityof financial markets, to ethical business practices,fair competition and personal trading, and also ourenvironmental and social responsibilities.
At the heart of our culture is the belief that, as
stewards of our clients’ money, we have a duty toprovide the right investment solutions to meet theirgoals. To do this requires us to understand theirinvestment objectives, risk appetite, and regulatory
and accounting frameworks, as well as the widersocial and environmental climate in which we all live.

Environmental, Social and GovernanceConsiderations
We strongly believe that environmental, social andgovernance (ESG) considerations are inherent tolong-term corporate value creation and contributeto the realisation of sustainable economic growth.
In the light of this, we view ESG issues as an integral
part of our fiduciary duty to clients and endeavour
to incorporate ESG principles in all our investment
processes. Our approach to ESG is outlined in
more detail under Principle 7. Our policies on ESG,
responsible investing and stewardship are available
on our website: Fiduciary and ESG Principles,
Commitment to Responsible Investing, Position
Statement on Climate Change, Climate-related

Financial Disclosure, Engagement and Stewardship
Strategy, Stewardship Activities Report and Selfassessment, and our Sustainability Report.

CultureWe believe that our diverse, inclusive and collaborative
culture is a key competitive advantage and supports
our ability to generate differentiated insights. Ourcommitment to diversity is enshrined in our Code of
Ethics and our staff members come from a rich diversityof backgrounds, with language capabilities covering all
the main Asian and European languages.
Our team meetings encourage widespreadparticipation, drawing on the collective intellect,
experience and cultural and gender diversity of ourteams and each individual’s experience to question
the market consensus. Combined with common
values based on mutual respect, our teams are wellcomposed to meet the challenge of investing indiverse, and fast-moving global and regional markets.
These principles of respect for diversity and the rightsof our fellow workers are set out in our Code of Ethics.
Our investment teams have autonomy to implement
their own investment philosophies and processes in
the markets and asset classes in which they specialise.
In order to support these philosophies and processes,
we are making investments in both our investment
and our stewardship teams and developing andbuilding further the resources we devote to ESG.
Specifically, in this last area, we are expanding ourteams in the UK and Asia to bring in additional
dedicated ESG staff to work alongside our investment
teams starting with three additional full-time ESG
hires in 2022. This is discussed in more detail underPrinciples 2 and 7.

Engagement
We believe that engagement is a key factor in
the stewardship of our clients’ assets. We find that
constructive dialogue with our investee companies
helps foster their long-term value and sustainablegrowth characteristics, improving both returns
for clients and managements’ accountability tosociety and the environment. This requires in-depth
knowledge of the companies and the environment
in which they operate, as well as wider considerationsof sustainability consistent with our investment
management strategies. Our long experience in theseareas means that the approach to engagement we
adopt sometimes needs to be adapted to culturaldifferences in different parts of the world. We discuss
engagement further under Principles 9, 10, 11 and 12.

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Principle 1:

Activity
Policies and Position Statements
In line with our commitment to continuous improvement,
during 2021 we took steps to ensure that our investment
approaches, strategy and culture continue to foster effective
stewardship. We reviewed and updated a number ofpolicies, including our Code of Ethics, Conflict of Interest andenvironmental policies on climate change. For example, we
amended our Environmental Policy to set a target of reducing
our greenhouse gas emissions from operations per employee
by 40% by 2030 compared to our 2019 level. These changes
are discussed more fully under Principle 5. We were also active
in our collaborative efforts with others in the industry. Our
ESG Global Steering Committee approved our membershipof the Net Zero Asset Managers Initiative (see Principle 10). We
invested in people, technology and ESG data extraction andintegration capabilities to ensure that we are able to provide
the level of service required to meet the needs of our clients,
which is described in more detail under Principle 2.
As a result of our review process, updates were made to anumber of our policies and position statements in 2021 suchas the amendment to our Position Statement on Climate
Change made by our ESG Global Steering Committee. In
addition, our Global Equity team updated their proxy voting
policy to emphasise the importance of ESG. As part of ourculture of continuous improvement, we continue to monitor
the effectiveness of these policies, which we anticipate will
evolve and may be strengthened in due course.
Staff Diversity and Inclusion
In terms of staff diversity, we recognise that we can dobetter. Currently,5 women make up 37% of our total staff
and occupy 20% of our management positions. We are
actively trying to raise the numbers. We give staff in Japan
at least two years’ time off to look after children – which
may be extended to three in special circumstances – after
which they are welcomed back at the same level as when
they left. We are long-time supporters of the Women’s
Empowerment Principles, established by the UN Global
Compact and the United Nations Entity for Gender Equality
and the Empowerment of Women. We are also a memberof the 30% Club Japan Investor Group, which aims to have
30% of all board seats of TOPIX 100 companies occupied
by women by 2030. Last year we went a step further andsigned up to a “30 by 2030” initiative, committing thefirm to ensuring that at least 30% of all our managerial
positions are occupied by women in 2030. We have alreadystarted to put that commitment into practice, raising the
proportion of female managers at the firm from 18.4% to20.0% over the year to January.

5

We are also actively seeking to create more welcoming
working conditions for LGBT employees. For instance,
employees in same-sex relationships receive the same
benefits as employees in traditional marriages. We are an
official member of LGBT Finance, an organization set up by
financial institutions in Japan to support LGBT people. Thisinitiative enjoys very visible grass-roots support from ouremployees and very engaged sponsorship from our senior
management. In 2021, for the third year running, Nikko AM
was awarded a gold award in the Pride Index, created bywork with Pride, a non-profit-making organisation that helps
companies and other organisations adopt and promote
LGBTQ-related diversity and inclusion initiatives.
We set up our first Diversity and Inclusion (D&I) Working
Group (the Women’s Working Group) in 2015 and wecurrently have four D&I working groups supported by the
Corporate Sustainability Department—Women’s, LGBT,
Disabilities, and Racial Equality—where employees plan
initiatives and events to promote diversity. For instance,
our working group for people with disabilities helps toprovide a better working environment for employees
living with disabilities. It also works to enhance employees’
understanding of each other’s needs and encourages crossdepartmental co-operation.
We adopted a new Diversity and Inclusion Policy inDecember 2021, underlining the firm’s commitment toembracing diversity and creating a work environment
free from discrimination and harassment. In it we statethat Nikko AM embraces and encourages individual
differences amongst staff and has a zero-tolerance policy
towards discrimination of any kind. These principles
apply, amongst other things, to our practices andpolicies on recruitment and selection, compensation
and benefits, professional development and training,
promotions, transfers, social and recreational
programmes, redundancies and terminations.

In line with our commitment tocontinuous improvement, during2021 we took steps to ensurethat our investment approaches,
strategy and culture continue tofoster effective stewardship.

As at 1 January, 2022.

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Principle 1:

It aims to ensure that:
●

●

●

●

all staff treat others with respect;
teamwork and participation are inclusive, allowing allgroups and perspectives to be represented;
a healthy work/life balance is promoted and encouraged
through flexible work schedules;
both we and our employees contribute to ourcommunities and develop programmes that support them.

Support for our Diversity and Inclusion initiatives
comes from the highest levels of the organisation, withparticular focus from Stefanie Drews, who was appointed
NAM Group President and COO of Nikko AM in April
2022. Ms. Drews has been a champion of diversity andsustainability issues within the company since joining
Nikko AM in 2014 as Head of Institutional Marketing andProposition and has been an internal campaigner onmatters of equality as she has moved through the ranksof the organisation.

Investments
Our main instrument for translating our investment
beliefs, strategy and culture into effective stewardship is
our investment teams. They have different approaches
and different opportunities to exercise stewardship,
which are described below and in the rest of this report.

EquityThe nature of equity voting rights and accessibility to companies
as a shareholder allows us to implement our investment beliefs
and enact our stewarding responsibility in many ways otherthan making an investment decision. These are discussed
further throughout the report, with our engagement and voting
activity covered in particular under Principles 9, 10, 11 and 12.
One example of enacting our stewardship responsibilities
during 2021 was our Global Equities team liaising with several
clients regarding their ESG priorities and developments. The
team intends to continue this dialogue and is working withour client services team to enhance quarterly ESG reporting.
Their goal here is to enhance our engagement by making
reporting more of a two-way process, with discussions
regarding clients’ ESG requirements included as part of ourregular client meetings and feedback loops.

We adopted a new Diversity andInclusion Policy in December
2021, underlining the firm’s
commitment to embracing
diversity and creating awork environment free fromdiscrimination and harassment.

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Principle 1:

Fixed income
Fixed income is an area where it can be more difficult
to have a direct influence on the direction of investee
companies, given the lack of voting power normally
attached to bond investments and generally more limitedaccess to companies’ management. Nonetheless, our teams
have been active in extending our stewardship activities
in a number of areas during the year, further discussed
throughout the report.
An example is where our Global Fixed Income team now
regularly engages with our Japanese clients on ESG andbroader stewardship questions and has started to be more
active in engaging with bond issuers. The pandemic hasraised anxieties amongst some clients about its impact
on returns, prompting the team to increase engagement.
In 2022, the Global Fixed Income team will be continuing
to review the effectiveness of both MSCI’s ESG company
monitoring tools and our own proprietary versions with aview to moving exclusively to the latter. The team will also
continue its regular overview of trading conditions andmake any necessary further refinements based on client
feedback. Our other Fixed Income teams also have their own
analytical tools to integrate ESG factors more effectively.
Our Asia Fixed Income team, for example, made significant
improvements to its ESG monitoring system during2021 and formalised the process by which ESG risks andopportunities recorded during the issuer analysis process
are factored into the outcome of our proprietary Internal
Credit Rating.

Outcome
Our activities to date, particularly those undertaken during2021, reflect our commitment to fiduciary duty and havebeen effective in embedding stewardship values across theorganisation.
We enhanced a number of policies and processes during
the year in order to ensure that we continue to evolve ouroversight and reinforce our culture of stewardship and put
them into practice in several areas. Much of the evidence forour activity will be found in later sections of this report.
We face different challenges to asset managers that have a
European or North American heritage. Japanese culture values
stewardship, but often approaches it from a different perspective
than Western societies. As we have grown over the last 60 years
from an organisation focused on the domestic Japanese market
into a global asset manager, we have brought with us these
Asian traditions of stewardship which are themselves evolving
as they meet Western practice. This process is challenging us
to review and enhance our approach to stewardship, which
has tended to be equity-driven and focused on generating
the best possible investment returns for our clients.
We are bringing greater focus to environmental and societal
outcomes, whilst recognising that there are opportunities forfurther development. This process of evolution involves longterm initiatives and a commitment to continuous improvement– values that are consistent with our Japanese heritage.

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Principle 2:
Signatories’ governance, resources and incentives support stewardship.

Activity
We regard fiduciary and ESG principles as paramount guides in fulfilling our duties as stewards of our clients’ assets. In
implementing these principles, corporate governance is critical. Our fiduciary and stewardship responsibilities are overseenby the NAM Group Board of Directors, which is headed by Non-Executive Director and Chairman, Yoichiro Iwama, and,effective from April 2022, our Executive and Chairman, Yutaka Nishida, and President, Stefanie Drews.
As of April 2022, three of the ten members of the NAM Group Board are female, reinforcing our commitment to gender diversity.
The NAM Group Board delegates responsibility for day-to-day decision-making to our Global Executive Committee (GEC),
comprising members of the senior management team, whose details can be found under the Leadership section of our
website. See chart below for a simplified diagram of our group governance structure, including how other key control andaudit functions relate to these committees.
NAM Group GovernanceGroup Board of Directors
Independent Directors

Risk OversightCommittee
Global Executive Committee
Compliance OversightCommittee

Employees

Board of Statutory Auditors
Audit and Supervisory Committee

Product
Committee
Control Functions

In 2019 we restructured the NAM Group’s supervisory and governance structure. This involved creating an audit and supervisorycommittee, while increasing the proportion of outside directors on the board to 60%. The role of the new committee is tostrengthen oversight and enhance our corporate governance framework. At the same time, Mr Iwama was appointed an
outside director on our Japanese Stewardship and Voting Rights Policy Oversight Committee (further details of this committee
are provided later in this section), where over half the members are now independent of Nikko AM. We believe this structure is arobust demonstration of our commitment to diversity and independence at board level, and thorough stewardship oversight.

Yoichiro Iwama
Outside Director and Chairmanof the Board of Directors

Stefanie Drews
President

Yutaka Nishida
Executive Chairman

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Principle 2:

The Governance of Stewardship Activities
Group Board of Directors
Independent Directors

Global Executive Committee

Global Stewardship Functions

Subsidiary-specific Stewardship Functions
Local Board of Directors

ESG Global Steering Committee

Independent Directors

Stewardship and Voting Rights Policy
Oversight Committee

Local Proxy Voting Oversight

Independent Directors

Investment Teams & ESG Specialists

Governance of stewardship activities is applied at both
the global and local subsidiary level. The oversight overall
employment of ESG is the responsibility of the ESG Global
Steering Committee which was established in 2016.
It oversees the integration of ESG within investment
teams, sets policy and develops strategy, makes external
disclosures and recommends ESG-related initiatives andparticipation in external bodies. The ESG Global Steering
Committee is governed by the GEC but in addition reports
directly to the NAM Group Board. It is chaired by the Global
Head of Investment and other members are the heads of
our investment teams worldwide, who are in charge of
stewardship implementation in their individual investment
processes (including ESG integration, company engagement
and proxy voting, where applicable). As well as its
monitoring and guidance activities, the Steering Committee
drives our implementation of the United Nations-supported
Principles for Responsible Investment (PRI).

Our Commitment to StewardshipWe believe our actions over the past few years demonstrate
our readiness to put principle into practice, starting at the
top of the firm. Our Non-Executive Director and Chairman,
Mr Iwama, has a wealth of experience within the Japanese
asset management industry, particularly in developing
stewardship policy in Japan. As a previous Chair of the Councilof Experts on Japan’s Stewardship Code (a body created by
the Japanese Financial Services Authority), Mr Iwama playeda leading role in introducing the concept of stewardship to
the Japanese asset management industry and was heavily
involved in establishing the current version of the Japan
Stewardship Code. As Chairman of the Japan Investment
Advisers Association from 2010 to 2017, he was intimately
involved in the introduction of Japan’s Stewardship Code

Local Stewardship Oversightin February 2014, which was later revised in May 2017 andagain in May 2021. He has played a crucial role in heightening
stewardship within the Japanese asset management industry
and corporate governance at investee companies.
During 2021, Mr Iwama also served as a member of theCouncil of Experts Concerning the Follow-up of Japan’s
Stewardship Code and Japan’s Corporate Governance
Code, which made recommendations about revising thetwo corporate codes. Details of the revisions proposed by
the council during 2021 can be found on the website of
the Japanese Financial Services Agency here but include
measures to:●enhance board independence,●

promote diversity,●

give greater focus to sustainability and ESG.

Under Mr Iwama’s supervision of the NAM Group Board, we
continue to strive for the highest standards of governanceand stewardship.
Our new Group President and COO is herself a vocal
champion of sustainability and diversity issues, both within
the organisation and publicly. During her years with thecompany, she has worked at fostering a culture based onrecognising talent and merit. She is also keen to boost the
number of women in senior roles. As stated under Principle
1, the number of women in managerial roles has increased
to 20% (and 30% at Group Board of Directors level as of April
2022), putting us on track to achieve our goal of 30% ofmanagerial positions by 2030. However, we see this as only
an interim goal on the way to parity.

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Principle 2:

Subsidiary-Level Governance
Each NAM Group subsidiary has an independent executive
team led by a regional head who reports to the NAM Group
President and is responsible for formulating and executing
targets and plans decided by the Group Board and GEC inline with local regulations and customs. Each regional office
is required to present its ESG implementation activities

regularly to its respective board. The global and local
stewardship framework is illustrated in the diagram “ TheGovernance of Stewardship Activities”. There are differencesin detail as to how these processes operate at subsidiarylevel, but they are most developed in our main Japaneseequities business, which we discuss below.

Japan Stewardship Functions

Oversight of Proxy Voting at our Japanese entity

Our Japanese operations represent more than half thebusiness, so we devote a great deal of resources to its
governance and stewardship. The Stewardship andVoting Rights Policy Oversight Committee monitorsand supervises our engagement with Japanese
investee companies and proxy voting, ensuringthat both remain in line with our Fiduciary and ESG
Principles and truly meets the interests of investors.
The committee was launched in 2016 as a way ofenhancing the transparency of our stewardship
activities and strengthening our governance. Fourout of the committee’s seven members are fromoutside Nikko AM, making it highly independent. Its
decisions carry weight, as it reports directly to the
NAM Group Board on matters such as the governanceof our stewardship activities and conflicts of interest,
ensuring, for example, that proxy votes are used in linewith our Conflict of Interest Control Policy. (For moreon this committee, see Principle 12.)
Directly answering to the Oversight Committee isthe Stewardship and Proxy Voting Committee, whichis responsible for formulating stewardship policy,
providing guidance on stewardship activities, and is also
responsible for updating our Group Proxy Voting Policy(addendums to which can be applied at the subsidiarylevel in line with local customs and the requirements of
the respective investment teams). An example of this was
an update in December 2021 to our policy on Standards
for Exercising Voting Rights on Japanese Stocks, whichcame into effect in April 2022. This is discussed in further
detail in our response to Principle 5.

Japan Subsidiary Board of Directors
ReportOversight/Resolution

Stewardship and Voting Rights Policy Oversight Committee
ReportOversight/Resolution

Stewardship and Proxy Voting Committee

Our Active Ownership Group (AOG) was set up in2017 in order to enhance the firm’s ability to: 1. makejudgements on how to exercise voting rights andimplement stewardship activities in our Japanese equity
portfolios; and 2. conduct engagement with Japanesecompanies not already covered by sector analysts inactively-managed portfolios. As a result, even stocks
which are held only in passive portfolios are now subject
to engagement.
The AOG’s analysts are responsible for conducting therisk assessments we use to filter out from our investment
universe companies at high risk of governance failings.
They also provide the Japanese equity investment teams
with other relevant ESG-related information derived
from their research and engagements. In 2021, Active
Ownership analysts started engaging with large andmid-sized firms specifically on ESG issues, with further
developments planned for 2022. The AOG is headed by
Masahiko Komatsu, whose background and experienceare described below. Further detail about the AOG’s
activities are provided under Principle 7.

Masahiko Komatsu, Group Manager, Active Ownership Group – Masahiko Komatsu
joined Nikko AM in April 2021 as group manager of the Active Ownership Group. His
experience prior to joining us includes working as a portfolio manager at Portfolia andnearly 23 years as an analyst at Prudential Investment Management, Schroders, and Polar
Capital Partners. While at Polar Capital, he concurrently served as head of the Japan equity
research team and as head of the firm’s Japan office. He has extensive experience in company
engagements, including collaborative engagements with other investors, which he gained
mainly at Polar Capital. He holds an MBA from Waseda Business School and is also a charteredmember of the Securities Analysts Association of Japan.

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Principle 2:

Stewardship Resources and Incentives
It is our global network of close to 200 investment
professionals, with their wide breadth of experience, who
are at the forefront of our stewardship activities, aided byour stewardship and ESG teams. As an organisation we arecommitted to sustainable and responsible investing andour portfolio managers, analysts and governance specialists
all share in this commitment. They apply this philosophy byimplementing stewardship in their day-to-day activities andpractising active ownership.
They are compensated using a methodology that is intended
to align their interests and motivation with the outcomes ofclient portfolios. Annual evaluations are based on quantitative
metrics such as the long-term returns of client portfolios (forexample, weighted portfolio returns for investment staff, or
performance of securities recommended for analysts), butalso the qualitative aspects of individual as well as groupperformance (for example, quality of analysis and contributions
to the team).
In recent years, all employees have had sustainability goals
incorporated into their annual performance objectives. This has
given staff the opportunity to think about how they can practise
sustainability in their roles and has sparked in-depth discussions
with management on how this can be further achieved at
departmental and group level. We view this goal-setting
exercise as part of a multi-year process of weaving sustainability
into our culture. Further information on these matters canbe found in our annual Sustainability Report which can be
downloaded from the Sustainability section of our website.

the level of service required to meet the needs of our clients.
This investment has ranged from ESG-specific resources,
training in stewardship themes across the workforce, client
communications, through to the means to engage andmonitor company engagements on a larger scale.

ESG Resources
We have been cultivating a global ESG community supported
by dedicated resources in each region which supports ourinvestment teams, with the aim of having all investment
professionals integrate ESG into their investment processes tothe fullest extent. At a global level, we also have a multi-officeteam working on our strategic ESG data strategy.
In our UK and Luxembourg offices we have taken astrategic approach, with project teams which have focusedthroughout 2020 and 2021 on the regulatory evolutionof ESG in the European and UK markets. Working groups,
including investment and operational staff, have focused on
areas such as ESG data disclosure and convergence projects
under the EU’s Sustainable Finance Disclosures Regulationand taxonomy regulations.

We have a strong emphasis on internal training as
stewardship is the responsibility of our entire workforce,and therefore all employees have an annual training planthat includes, but is not limited to, topics such as conflicts ofinterest, personal trading and our code of ethics. Investment
employees across the firm’s global network undertake
responsible investment training via an online course
offered by the PRI Academy as part of our continuing focus
on implementing the PRI’s six Principles for Responsible
Investment. The training concentrates on how ESG issues
affect business and investment decision-making throughthe use of financial modelling and in-depth case studies.
Our long commitment to ESG is reflected in the fact that
we launched Japan’s first socially responsible investment
fund as long ago as 1999. We now practise deep and direct
ESG integration across the firm, where every investment
team and department integrates ESG directly into theirwork. We have a number of systems, platforms and forums
which allow our global investment teams to share researchanalysis on events and issues, especially those that may notalways be covered in the media. During the year, we haveinvested in people, technology and ESG data extraction andintegration capabilities to ensure that we are able to provide

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Principle 2:

In Singapore meanwhile, we have a working groupdriving our response to the local regulator’s Guidelines
on Environmental Risk Management for Asset Managers,
focusing on the themes of governance and strategy, researchand portfolio construction, portfolio risk management,
stewardship and disclosure of environmental risk information.

voluntary and mandatory sustainability reporting
requirements, drafting new and updating existing ESG
policies and strategies, arranging staff training, sharing
various tools and resources, reporting and both hosting andattending ESG-related seminars. Our aim with these efforts is
to build an ESG community throughout the firm.

In New Zealand, our team is preparing for upcoming climaterelated disclosure requirements, one of the aims of whichis to ensure that the effects of climate change are routinely
considered in investment decisions and to help smooth thetransition to a more sustainable, low emissions economy.

One of the key members of the ISP team in Japan is ESG
Specialist Yukari Kaito, who ensures ESG is integrated into
the work of investment teams by supporting them with ESG
data, managing relationships with external organisations
and assisting in communicating with clients on our ESG
activities (see box).

Natalia Rajewska, our Lead Global ESG Specialist based in
Singapore, works closely with investment teams acrossregions with the aim of strengthening the firm’s ESG
capabilities and providing further insight on broader
ESG topics. She is also supporting our compliance withvarious regulatory requirements as well as mandatory
and voluntary ESG reporting requirements. Ms Rajewska
has been leading an initiative with investment managers
globally to identify processes that could be strengthened
and also areas of potential collaborative engagement. We
will be further building and developing our team of ESG
specialists, including additional hires in 2022. (For more on
ESG integration see Principle 7, engagement, Principle 9,
and collaboration, Principle 10.)Natalia works very closely with the Investment Support& Planning Department (ISP) and ESG Specialists inJapan, who jointly serve as a secretariat to the ESG Global
Steering Committee, providing dedicated expertise andadministrative support. This support includes meeting

In Japan, we also have four engagement and proxy voting
specialists in the AOG involved in ESG engagement withinvestee companies and other stakeholders, as well as
making proxy voting decisions. Additionally, we have a
stewardship and proxy voting specialist in the ISP team,in charge of incorporating ESG into our engagement andproxy voting decisions in non-Japanese holdings held by
our Tokyo office.
We are mindful that the ESG industry and market
expectations are evolving. As a result, we recognise that ourcurrent structure must also evolve to further improve ourstewardship activities.

Our aim with these efforts is
to build an ESG community
throughout the firm.

Natalia Rajewska, Lead Global ESG Specialist – Natalia Rajewska joined Nikko AM from ING Bank in Singapore,
where she was a vice president covering APAC clients, having originated and structured several market-leading
sustainable finance instruments. She has over seven years of international experience in sustainable investment
and ESG consulting with global ESG leaders. Prior to ING, Ms. Rajewska worked at Aviva Investors as an ESG
analyst, where she supported the investment team with ESG analysis and engaged with boards on ESG issues.
She has also worked at Corporate Citizenship, a sustainability consultancy, and an impact investment foundationin Singapore. Ms. Rajewska holds a Bachelor of Business Administration from The Hague University and an MSc in
Economic History and International Development from The London School of Economics and Political Science

Yukari Kaito, ESG Specialist – Yukari Kaito joined Nikko AM’s Investment Support & Planning Department
as an ESG specialist in December 2018. Prior to joining Nikko AM, she was a Specialist in the Global Corporate
Responsibility team of a listed company in Japan, working on enhancing corporate value by implementing ESG
throughout the organization and increasing corporate ESG disclosure. Prior to this, she worked for more than
five years as an ESG analyst, most notably as a principal ESG analyst overseeing ESG research on over 1,800
companies, providing advice on proxy voting and engaging with boards of directors on behalf of clients. She
holds a Master of Environment from the University of Melbourne and has co-authored a children’s book on
Climate Change.

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Principle 2:

Data from external service providers is used as one input
in our investment decision-making process to supplement
our proprietary analyses. We use a wide range of data froma combination of public disclosures (issuers’ annual andsustainability reports etc.) for the purpose of research, aswell as through direct engagement and communication
with companies and external ESG analysts and data
providers such as MSCI ESG, Sustainalytics, Good Bankers,
Institutional Shareholder Services (ISS) and Bloomberg. ISS,for example, is used to execute our proxy voting, which
we consider a key activity in respect of our stewardship
responsibilities. ISS also provides research and customised
voting recommendations based upon our voting andresponsible investment policies but, again, the ultimate
decision on how we vote is taken in-house. Our interaction
with ISS is discussed in more detail under our response to
Principles 8 and 12.
Having access to multiple sources of data can be usefulin allowing us to cross-check our assumptions. However,
we recognise that third-party data providers haveshortcomings, including a lack of consistency arising fromdifferences in methodology, therefore we treat this data
as supplementary to our proprietary research as further
outlined in Principle 8.

As stewardship needs andexpectations are continuously
evolving, we continue to adapt
and fine-tune our responsibilities
and activities as stewards of ourclients’ capital.

OutcomeAs a Group we are committed to active stewardship. Our
governance structures and stewardship processes address
several areas, including the management of conflicts ofinterest, engagement in active and passive investment
management, our sustainability efforts and information
disclosure.
As stewardship needs and expectations are continuously
evolving, we continue to adapt and fine-tune our
responsibilities and activities as stewards of our clients’capital. This includes our responsibilities to the economy,
the environment and society. We understand that we havean important role to play as guardians of market integrity
and in working to minimise systemic risks, and we willcontinue to implement meaningful changes to advance ourability to meet these responsibilities.
We recognise that the topics that fall under the umbrellaof stewardship are rapidly developing and we are taking aproactive approach to strengthening the management of
our stewardship activities. For example, whereas we publicly
disclose results of proxy voting records for the vast majorityof our equity AUM, in some regions in which we operate
this is provided only to clients on request in line with local
stewardship requirements.
As a result of our review process, updates were made to anumber of our policies and position statements in 2021.
These and audit assessments are covered in detail underPrinciple 5. We continue to monitor the effectiveness ofthese policies and will be actively looking to strengthen
them as our approach to stewardship evolves.

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

Context
We always seek to put the interest of our clients first in all our activities. We aim to identify all actual or potential conflictsof interest and maintain and operate arrangements to minimise the possibility of conflicts giving rise to a material riskof damage to the interests of our clients. We have established a Group Conflict of Interest Control Policy (addendums towhich can be applied at the subsidiary level in line with local requirements), which has been designed to prevent us fromprejudicing the interests of customers in the conduct of our business and is reviewed at least annually. Potential new
conflicts are considered as part of any new business development and/or business process changes.
In addition, group subsidiaries maintain their own conflicts of interest register which records potential conflicts that havecome to light during their activities and the measures taken to resolve them. Each register is regularly reviewed andapproved by the relevant subsidiary board of directors.
More details about how our conflicts of interest policies operate can be found in the Activity section below. However, ingeneral, when identifying the types of conflict of interest that may arise, we take into account, as a minimum, whether we or
our directors, managers or employees or a person directly or indirectly linked to the firm:●●

is likely to make a financial gain, or avoid a financial loss, at the expense of a client;has an interest in the outcome of a service provided to a client or of a transaction carried out on behalf of a client, which isdistinct from the client’s interest in that outcome;●has a financial or other incentive to favour the interest of another client or group of clients over the interests of the client;●carries on the same business as the client; or●

receives or will receive from a person other than the client an inducement in relation to a service provided to the client, inthe form of monetary or non-monetary benefits, other than the standard commission or fee for that service.

Responsibility for controlling transactions and other conduct likely to give rise to conflicts of interest is managed by ourcompliance departments. Together, the Group Compliance Heads are charged with maintaining the conflicts of interest
control framework and periodically verifying its effectiveness, as well as continuously striving to improve it. They are also
responsible for communicating all aspects of conflict control to employees through education and training programmes.
They are immediately answerable either to the subsidiary board of directors of the relevant subsidiary or, if the incident
occurs in Japan, to the Compliance Oversight Committee, part of the GEC.
One area where conflicts can arise is as a result of our ownership. Nikko AM is ultimately owned by Sumitomo Mitsui
Trust Holdings (SMTH), which is a large Japanese conglomerate with interests in, amongst other things, banking, pension
administration, real estate, stock transfer, custody services, and asset management. Nikko AM itself has subsidiaries in the
UK, Luxembourg, the US, Hong Kong, Singapore, New Zealand and has a branch office in Germany and associates in China,
Malaysia and Australia.
Our Corporate Structure
Sumitomo Mitsui Trust Holdings, Inc.

Nikko Asset Management Co., Ltd.

Related Group Companies

Nikko AM Subsidiaries

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Principle 3:

Activity
Examples of potential conflicts of interests related to stewardship that may arise during the course of business and how wemanage these are summarised in the table below.
Conflict

ExampleManagement

Related groupcompanies

In undertaking business for our clients, ourdealings, or other arrangements, with relatedgroup companies present possibilities for us
to treat our related group companies morefavourably than unrelated companies.

We and our related group companies haveadopted policies and procedures throughout ourbusinesses to manage conflicts of interests. These
policies and procedures are subject to our normalmonitoring and review processes.

Fair allocation

The processes involved in the research of
securities, execution of trades, allocationof securities forming part of a trade andparticipation in new issues could result in unfair
trade execution or allocation among clients’accounts. Investment and/or trades may be
executed in a way that favours one or moreclients to the disadvantage of others.

All trades across accounts are pre-allocated andtrades that are partially filled are allocated prorata. Compliance monitoring is conducted toensure adherence.

Proxy voting

Where clients permit us to exercise voting
rights attached to securities held in theirportfolios, the possible conflicts of interest
include circumstances where: (i) we manage
assets for companies whose management
are soliciting proxies and the failure to vote infavour of management resolutions may harm
our relationship with the company, (ii) we may
have a business relationship with a proponentof a proxy proposal and may manage assets forthe proponent, or (iii) any employee may havea personal or outside business interest in theoutcome of a particular proxy vote.

Our Proxy Voting Policy is designed to ensurethat votes are cast in accordance with the best
economic interest of clients.

Outsidedirectorships

Employees who have access to portfolio
management or proxy voting activity or directors
who hold similar positions with another firmor firms may be able to use their position andinformation obtained from either firm to obtainfinancial gain or avoid a loss.

All employees are required to seek Complianceand senior management approval of any
outside directorships which they may hold. Any
committee members who have oversight ofother companies are excluded from agenda items
where Nikko AM’s stewardship activities involving
such companies are discussed.

An area of particular focus for our efforts to control conflicts of interest is voting. We annually disclose a summary of voting
activity records on our website, and on a quarterly basis individual assessments are conducted at a regional level considering
the conduct of voting. An example of this monitoring is the work of our Stewardship and Voting Rights Policy OversightCommittee, which meets quarterly to review how we should vote on individual proposals from investee companies in Japanthat might trigger a conflict of interest. A regular item on the committee’s agenda is reviewing votes involving related groupcompanies and confirming that there was no bias in favour of the related group company or, alternatively, flagging thatthe voting decision may have been influenced by the connection. In doing so, the committee is aided by advice from our
proxy voting agency ISS. We firmly believe that such reviews of individual records help us to increase the transparency of ourstewardship activities and minimise conflicts of interest when we exercise our voting rights. We believe that actively explaining
the reasons for our voting decisions to the independent Oversight Committee helps us manage potential conflicts of interestand facilitates constructive engagement with investee companies. For more on our voting activities, see Principle 12.

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Principle 3:

OutcomeNo actual conflicts of interest arose during the year thatprevented us from performing our stewardship activities inaccordance with the best interest of our clients.
During the 2021 calendar year, comparisons and analyses were
performed on our regulations for managing conflicts of interest
to identify a common Group approach, as well as matters thatneed to be addressed in everyday operations. Six additions
were made to our related Group companies appendix during
the year, reflecting our analysis of the wider SMTH Group.

We believe that our thoroughmanagement of conflicts ofinterest helps to maintain thetrust of both clients and investee
companies and allows us to
conduct our stewardship activities
more effectively.

We believe that our thorough management of conflicts ofinterest helps to maintain the trust of both clients and investee
companies and allows us to conduct our stewardship activities
more effectively. Our everyday stewardship activities such as
proxy voting are governed by the management frameworkand supervision functions described above, including ourpolicy for managing conflicts of interest.
Whilst there were no actual conflicts of interest in 2021,
we identified a number of new scenarios that may cause
potential conflicts:●●●

where our investment management and investment
advisory operations have a strategy that is the same or similar;
where the firm purchases investment instruments forclients issued by the same firm that also acts as broker for
us in making the transaction;
where the firm purchases for one client or group of clients
investment instruments that are issued by another client,potentially unduly favouring the issuer.

Existing processes such as order placement committees andallocation policies already address these potential conflicts,
but we are planning further improvements to the systematic
processes that we use to identify such potential conflicts.

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Principle 4:
Signatories identify and respond to market-wide and systemic risks to promotea well-functioning financial system.

Activity
As an asset manager, we are reliant on our ability to invest in liquid, transparent and functional
markets. Market-wide and systemic risks directly affect the value of the assets that we invest in,therefore, as a fiduciary, one of our key responsibilities is to manage these risks in order to improveoutcomes for our clients. As long-term investors it is in our interest to support and advanceinitiatives that aim to reduce market-wide and systemic risks and, as responsible stewards, werecognise both the responsibility – and the opportunity – we have to promote well-functioning,stable markets in the interest of the wider economy, environment and society.
A core part of our philosophy is that our investment professionals are best positioned to identify
market-wide and systemic risks through their research and engagements. The natural corollary ofthis is that they then have the freedom to follow their own high-conviction approaches in dealing
with these risks, supported by the infrastructure and resources of the wider organisation.
Our fundamental research is supplemented by external sources which enhance our overall
understanding of the investment landscape. External sources include contacts with marketmakers and related participants, dialogue with companies, sell-side research, independent
research vendors, roadshows, presentations, conferences and rating agencies.
Research is shared globally through informal information-sharing platforms, as well as more formal
regular meetings to discuss views, build synergies, debate and refine ideas. Research notes arerecorded and distributed across geographies and asset classes. Our teams also share unique andtimely analysis on important macroeconomic and political issues, especially those that may notalways be covered in the media. Ad-hoc meetings may also be organised between offices todiscuss urgent market news and/or important developments.
Emerging systemic risks and their impact on companies or industries are discussed at regularinvestment meetings. For instance, our global fixed income team holds monthly meetings toreview the foreign exchange and interest rate outlook as well as quarterly “horizon-scanning”
meetings which consider long-term market issues without being distracted by the immediate
focus of products or issuers. The purpose of these meetings is to address fundamental challenges
to the smooth functioning of global fixed income markets and what we can do to mitigate thosechallenges for our clients.
Specific challenges to the functioning of markets during the year have included the pandemic
and upheavals in the Chinese property market, alongside changes in interest rates, while in the
background is the ever-present threat of climate change. We look at how we tackled each of theseissues in the following examples.

A core part of our philosophy
is that our investment
professionals are best positioned
to identify market-wide andsystemic risks through theirresearch and engagements.

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Principle 4:

Global Fixed Income and the Pandemic
In 2020 our investment teams faced an unprecedented situation as the COVID-19 pandemic significantly raised risks
in markets. The shutdown in March 2020 led to an extreme reduction in market liquidity and wider challenges causedby the low level of global interest rates. Our Global Fixed Income team closely monitored portfolio risk throughout theperiod, but remained resolute in maintaining our long-term perspective. As we entered calmer market conditions in April
2021, external forces lost their dominance and the investment team was able to return to managing our portfolios withmore emphasis on fundamental, bottom-up, factors.
We feel that the fact that our fixed income portfolios were able to come through this difficult period so successfully
was a good test of our risk-management processes. The team uses a portfolio dashboard to help monitor systemicrisk from a quant level to give an understanding of the ranges of risk in the market from a number of angles, including
regions, countries, maturity buckets, capital structures, currency, ratings and sectors as well as the concentration of risks
and portfolio limits. This process provides a high-level picture of global fixed income markets, with each region being
assessed against macroeconomic, microeconomic, technical and valuation factors, helping us to navigate the current
environment for global risk.
Detailed below is an example of how these scorecards changed over the 12 months from April 2020, when pandemic
fears were at their height and causing turmoil in markets, to April 2021, when more normal conditions returned. The
colour coding – red for “risk off”, green for “risk on” – provides a clear visual indication of how regional risks changed
between the two periods.
Regional Scorecard April 2020
Region

Macro

Micro

Technicals

Valuation

EuropeNorth America
Asia
Japan
South America
Australia

OFF
OFF
OFF
OFF
OFF
OFF

OFF
OFF
OFF
OFF
OFF
OFF

OFF
OFF
ON
OFF
ON
ON

ON
OFF
OFF
OFF
OFF
ON

Overall
Assessment
OFF
OFF
OFF
OFF
OFF
OFF

Source Nikko AM, as at 1 April 2020

Regional Scorecard April 2021
Region

Macro

Micro

Technicals

Valuation

EuropeNorth America
Asia
Japan
South America
Australia

OFF
ON
ON
OFF
OFF
ON

ON
OFF
ON
OFF
OFF
ON

ON
ON
ON
OFF
ON
ON

ON
ON
OFF
OFF
OFF
ON

Overall
Assessment
ON
ON
ON
ON
OFF
ON

Source Nikko AM, as at 1 April 2021

This scoring process provides the portfolio management team with a gauge of risk and risk appetite in the market, while also
providing a one-month forward-looking view. The portfolio managers meet regularly to discuss information and research on
the current condition of credit markets. These regional scorecards provide background for these discussions, along with ourcurrency and interest rate views, helping to determine whether any changes are needed to be debated at our investment
strategy meetings.
Once we have undertaken our analysis from a regional perspective, the team will then perform a country analysis.
Amongst the many factors we look at, close attention is paid especially to central banks’ policy stance, governments’ fiscal
positions, financial stability, and domestic and geopolitical developments. Each country is scored and the investment
team’s views are subsequently checked against market consensus and central bank projections to gauge the extent of risk
within the market.

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Principle 4:

Global Equity and the Pandemic
As long-term stock pickers who carefully assess the bottom up influences on the companies we invest in, our focus on
profitability and balance sheet quality over the long term helps safeguard our clients’ assets. Our allocation of capital tobusinesses that we feel can stand the test of time from a quality point of view also contributes to the efficient functioningof the market overall as businesses with these quality characteristics are rewarded over time.
As explained above, in 2020 we faced an unprecedented situation. From the spring of 2020 and throughout 2021 as
lockdown restrictions developed and changed around the world, our Global Equity team was confronted by the scenariothat many companies in the portfolio faced a zero or dramatically reduced revenue situation. To ensure the smoothfunctioning of the system and maintain confidence that each business had sufficient capital to manage through thesecircumstances, a comprehensive review of company balance sheets was undertaken for all portfolios. This analysis gave aclear understanding of the businesses which were most affected and which would need access to additional funding totrade through an extended period of earning no income and extremely negative cash flows. Only one investee company
required additional equity funding during 2020 and 2021, a testament to the strength of our fundamental research andunderstanding of liquidity requirements which protect our clients’ assets in times of stress but also ensure the efficientworking of the system overall.

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Principle 4:

Fixed income: China Real Estate Contagion
Another serious systemic risk faced by our investment managers last year was the difficulties that emerged in the China realestate market in the second half of 2021. A change in regulations in China limited the ability of real estate companies there
to take on additional debt. This raised investor alarm about the sector, which was exacerbated in August 2021 when one of
the largest Chinese property companies, Evergrande Group, revealed that it was experiencing cash-flow issues, prompting
a sharp fall in the share price. Rumours of financial difficulties had already surfaced during the summer, when the company
was downgraded by rating agencies and the company started to sell assets to generate cash. Even so, it subsequently missed
several debt payments. This series of events sparked fears of contagion in the sector and had an impact on global markets,
leading to a significant slowdown in foreign investment in China in the autumn of 2021.
We were exposed to the Chinese real estate sector in several portfolios and early on realised that the seriousness of thesituation would require collaboration between a number of teams. Noting the likely global ramifications arising from thedeterioration in the sector, the developments were highlighted and discussed on multiple occasions in 2021 as part ofthe monthly Nikko AM Global Credit Committee meetings, attended by fixed income teams globally and the head office
investment risk team. In addition, dedicated discussions on the topic were organised and held in June and November,attended by investment teams from a number of asset classes, including equities.
As a result of our rigorous analysis and cooperation between our teams across Japan, Asia and the UK, the systemicrisks arising from the China real estate sector were identified early. The Asia fixed income team reduced exposure to thesegment and moved its portfolios up the credit quality curve during the second half of the year, successfully avoiding themany defaults that occurred in the sector. This multi-asset, multi-disciplinary collaboration also armed other investment
teams with early warning of how the situation might unfold, allowing them to reduce exposures in good time.

Money Market Funds: Pandemic-Induced Interest Rate Changes
Money market funds are characterized as low-risk, low-return investments which aim to provide investors with a safe
way to invest in secure and highly-liquid, cash-equivalent or short-term debt instruments. Returns from the underlying
holdings – and hence the funds – are more than usually dependent on interest rates.
During 2020 and 2021, in the period when central banks around the world sharply reduced interest rates in responseto the COVID-19 pandemic, we closed three of the money market funds we managed to protect the investments of
our Japanese clients. On all three funds during this period, interest rates were moving towards zero or even negative
levels. It was clear that it was highly likely that we would not be able to fulfil our clients’ objectives for these funds andrecommended that the funds be closed.
For two of the funds, in order to ensure that 100% of clients’ capital be returned to them, we recommended a course ofaction that would deviate in some respects from the funds’ applicable legal documentation. In this case, we saw the higher
fiduciary duty to our clients being to protect their investments as much as we could, rather than stick to the letter of thefunds’ legal documentation. In the event, we were able to ensure a smooth closure of all three funds, with clients being
repaid without loss and the Japanese regulator in full understanding and agreement with the approach that we had taken.
We believe that this is a good reflection of our approach to stewardship. By taking pre-emptive action, we closed threefunds where clients’ interests would not have been best served by continuing to invest.

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Principle 4:

Climate Change
We recognise climate change as one of the greatest
challenges the global community faces. It is a primeexample of a market-wide, systemic risk to the assets inwhich we invest and, as such, we consider it our fiduciary
duty to address it in managing our clients’ assets. We adopt
a two-pronged approach to climate risk:
1. Collaboration with other stakeholders: We workwith other stakeholders to help develop solutions andsupport global initiatives to address the issue, such as theUN’s Paris Agreement to limit carbon emissions and theUN’s Sustainable Development Goals. We are involved in
Asia with other fund managers seeking to collaborate toaddress the issue of climate change. We are signatories
to, and participants in, a large number of environmental
initiatives, both globally and locally. Our involvement inthese several bodies is discussed in more detail underPrinciple 10.
2. Addressing climate-related portfolio risks: We
see climate-related factors as both a key ESG risk and apotential opportunity for the companies in which weinvest. Climate change is therefore factored into theinvestment processes of our teams across asset classes inorder to ensure our investments are aligned to properly
address both the risks and opportunities.
Our investment approach focuses on ESG integration. We
therefore continually strive to recognise, understand, andimprove our methodologies for assessing the risks andopportunities of climate change in our clients’ portfolios.
This includes appreciating the scientific implications of
those methodologies, as well as the structural changes
likely to affect the business environment of the investee
companies we analyse.
Climate change is an issue that is likely to affect all sectors,
albeit on different timescales. Some impacts are direct, suchas carbon taxes, while others are indirect, such as the effects
on ecosystems and biodiversity. Beyond known effects, we
also acknowledge that systemic changes may arise from theincreased instability of physical systems as global temperaturesrise. Below we list some of the impacts we consider:●●●

the regulatory and operating environment, which influences
the degree of adaptation and vulnerability of companies toclimate change;
the physical impact on business activities, which will differ
across industries and locations;the social pressures on stakeholders, which may
influence consumers’ product selection and supplychain management.

To assess these impacts, we use climate-related research tools
and analyses, such as carbon footprinting, shadow pricing andidentifying our exposure to assets considered to be at higher
risk of being “stranded” by the move towards a low-carbon
economy. More detail on our approach to climate change canbe found in our Position Statement on Climate Change, our
TCFD Report and the discussion under Principles 7 and 10.
As a firm, we have been certified as carbon neutral since2019 by Carbon Footprint Ltd, a UK-based consultant. We
use the consultant for carbon assessments and offsets: itpurchases carbon credits and retires them on our behalf
to balance our emissions.

 ollaboration to promote wellCfunctioning markets
An important way in which we promote well-functioning
financial markets is through our participation in industry bodies
and forums, which help us to identify and address market
and systemic risks and ensure that our processes, policies
and procedures remain relevant. (See below case study foran example of how we collaborate to improve the functionof debt markets.) Each of our subsidiaries is a member of theapplicable local regulatory and industry bodies, for example
the Investment Association in the UK. Some of the membersof our subsidiaries take an active role in these industry bodies.
These are outlined in more detail under Principle 10.

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Principle 4:

Managing Climate Change Risk in our Japanese Equity Portfolios
While we take account of climate change considerations in our portfolios, we recognise that climate-related impacts
are complex and uncertain. Unless directed to do so by our clients, our approach is to actively engage with our investee
companies and exercise our voting rights rather than applying blanket exclusions of investments based on climatechange factors. As described under principle 7, we believe this is more effective in upholding ESG and stewardshipstandards for our clients, the broader economy and the environment.
In our Japanese Equity portfolios, our investment research incorporates Creating Shared Value (CSV) evaluations (moreinformation on this can be found under Principle 7) to integrate factors related to competitiveness, ESG and financial
strength. During 2021 we made a number of enhancements to this process, including adding carbon intensity and resilience
factors to the ESG themes. As a result, each of our Japanese Equity portfolio managers now receives data on the carbon
intensity of the portfolios that they manage versus the respective benchmark, as well as carbon intensity data at the sector
and underlying stock level. This enables them to identify very clearly where the contributions to the carbon intensity of theirportfolios are coming from, giving them the ability to adjust engagements with investee companies accordingly.
In line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), we encourage ourinvestee companies to identify material climate change risks and opportunities in a range of scenarios, integrate material
climate change risks and opportunities into their overall business strategy and risk management, and disclose their
management policies and processes toward meeting the goals – and resulting performance – that emerge from theseabove activities. Trends such as decarbonisation may put companies at risk of potential cost rises, yet their brand power
may be damaged if they fail to take sufficient action. At the same time, this process gives us the ability to capture thefuture potential of companies to respond to the transition to a low-carbon economy as such shifts are creating growth
opportunities for companies with environmentally-friendly technologies. We use our engagement to urge firms to addressthese changes, for example by allocating business resources to related fields and preparing for the associated risks.
In one example during 2021, a portfolio manager identified a holding that accounted for less that 1% of the financial
weight of their strategy yet accounted for 11.5% of its carbon intensity. The investment team already had a soundunderstanding of the company’s environmental policies and goals, such as emission reduction targets, however following
subsequent engagement meetings the company disclosed that it had formulated a long-term vision based on thepremise of a transition to a carbon-neutral society. It has established a sustainability policy and structure, identified
climate-related risks and opportunities, conducted climate-related financial impact assessments using internal carbon
pricing, and undertaken climate scenario analysis. It also disclosed further details of initiatives to invest in net-zero
technology in the next three years, including Carbon Capture Utilization and Storage (CCUS) and renewables. We arepleased with the progress that the company has been making but will continue to monitor this against future targets.

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Principle 4:Case Study: collaboration with the World Bank
We have long experience of working with wider industry bodies to improve the functioning of markets. The WorldBank is both an active market participant as a debt issuer and is also a key agent in determining the shape of market
innovations. We have been collaborating since 2007, when we launched a Green Bond fund with the Bank, and havemaintained a continuing dialogue ever since. In 2021, the key topics we discussed were:
1. World Bank market intervention
In the context of our Green Bond Fund, we discussed the size of new issues or taps in currencies where there is little
or no secondary market inventory in certain maturities. This discussion covered minimum issuance size and target
maturity bands for tapping existing issues and also issuing new bonds in a range of currencies to improve portfolio
diversification and market liquidity. The difficulties associated with tapping existing bonds from the issuer’s perspective
were discussed, as well as the possibility of the World Bank reducing its minimum issue size in order to match demand.
2. The EU’s Sustainable Finance Disclosure Regulation (SFDR) and EU taxonomy
This discussion centred on how to ensure that bonds issued by the International Bank for Reconstruction andDevelopment (the lending arm of the World Bank) are appropriate for one of the EU’s new so-called SFDR article
9 funds, which are defined as funds that have either sustainable investment or a reduction in carbon emissions as
their objective. We also wanted to know how the Bank was proposing to meet the challenges of the forthcoming EU
taxonomy, a classification system to establish what economic activities can be officially recognised as “sustainable”.
We discussed how legacy bonds would fit with these regulations and how the Bank would ensure environmental
objectives, for example, greenhouse gas emissions, were met. We agreed to continue this dialogue as more
information and understanding emerges from these regulations in 2022.
3. Products for Japanese investors
A key part of our dialogue with the Bank is developing product ideas that will be suitable for our Japanese investors.
In 2021, we explored the idea of a new fund that would include collaboration with the International Development
Association (IDA), a subsidiary of the World Bank. We will continue exploring this idea and others in 2022.

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Principle 4:

Managing portfolio risks
One of the key defences we have against systemic risks is
our Group Investment Risk Management Department. It
operates independently of the investment management
division, with a separate reporting line to the Chairman
via the Chief Risk Officer. The department oversees our risk

management framework, keeping track of our exposure to anumber of risks, including market risk, counterparty risk andliquidity risk in order to ensure our portfolios are aligned tomeet the best interests of our clients.

Group Risk Management Framework
Global Executive Committee

Risk Oversight Committee

Chief Risk Officer (CRO) Global Head of Risk Management

Enterprise Risk Management Department

A number of measures, such as scenario analysis and stresstesting, are used to monitor exposure and the resilience ofour portfolios to market shocks. In addition to these regularmeasures, ad-hoc stress tests are run in response to developing
market risk. These scenarios may cover short- or long-termtime horizons using various macroeconomic and firm-specificassumptions. Historical scenarios include the Global Financial
Crisis, while hypothetical scenarios may look at market shocks
resulting from a single risk, such as an oil supply shock.
The Group’s Risk Oversight Committee reviews the firmwide stress-test and scenario analyses and their impact on
the firm’s business at its quarterly meetings. Once risks are
identified, we have a responsibility as an active manager tomitigate them in order to achieve the best outcomes for ourclients. During periods of market upheaval, we might also
increase liquidity in our portfolios, either by increasing cash
balances or by switching into more liquid instruments. Thismight be to provide a buffer to market volatility or to giveus the ability to deploy cash when buying opportunities
emerge, or both. We must also remain alert to the need toensure liquidity is sufficient to meet client redemptions.
We have a particular interest in Danish mortgages, as further
described under Principle 7, where we see ourselves asgatekeepers to a particularly attractive market for Japanese
investors. We regularly assess the liquidity of the market,
the local yields available and how they appear for Japanese
investors after currency hedging. We also regularly review
the effectiveness of our analysis, including using models of
prepayment risk, as well as market liquidity and counterparty
risk. A key risk for any fixed income asset is that of default
and the negative impact that would have on the price.

Investment Risk Management Department

Outcome
We believe that the examples we have outlined show that
our investment teams were effective in identifying andresponding to market-wide and systemic risks during 2021.
Our risk management framework and active management
style meant that it was not necessary to invoke liquidity
measures in our portfolios in response to periods of market
volatility, such as the emergence of the Omicron andDelta variants of the COVID-19 virus, and we were able
to effectively reduce exposure to the Chinese real estatemarket at an early stage of the crisis.
Due to the long-term nature of the risks that climate change
poses, it is not yet possible to determine whether themeasures we are putting into place to address this risk will
be effective. Nonetheless, we will continue to enhance ourstrategies and methods to monitor and calculate the climate
effects of our investment strategies, while developing
approaches that minimise global warming. In doing so, wewill continue to engage with other stakeholders in our effort
to promote well-functioning markets.
We are an active member of a number of industry
collaborations, particularly those aimed at climate change.
Several announced significant advances or initiatives
towards reaching their goals during 2021. These are
discussed in detail under Principle 10.

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

Activity
All of our policies and processes, including our stewardship policies, are subject at least annually to a review and assurance
process to ensure that they remain appropriate and effective. The review process varies depending on the substance ofthe policy, but in principle the process is as follows: creation and drafting (for new policies) and revision by the applicabledepartment, if relevant subsequent review by the appropriate committee, then review by either the subsidiary board, in thecase of local policies, or the GEC and Group Board, in the case of global policy.
The key policies that are applied to stewardship activities are listed below, with any changes made during 2021 detailed in
the Outcome section. (We have not detailed policies less directly related to stewardship, but they follow the same review
process described above.)●Group Code of Ethics and Business Conduct●

Group Commitment to Responsible Investing●Group Conflict of Interest Control Regulations●

Group Engagement and Stewardship Strategy●

Group Proxy Voting Policy●Group Best Execution Policy●Group Trading Policy●Group Environmental Policy●

Regulations on Engagement and Compliance Regarding Fiduciary ESG Principles

In terms of audit and assurance, we have a number of internal checks and balances provided by, for instance, oversightcommittees that have a majority of independent non-executive directors, as well as our compliance department. Various
stewardship activities are audited by outside bodies, including the PRI and our external auditors. Our policy is to audit eachdivision every two years, with a follow-up to ensure implementation of any corrective action identified as a result of theaudit. There were no major audit issues raised during 2021.

Risk Governance and Oversight
At a group level, responsibilities for our risk governance and oversight are split according to the “three lines of defence” model:●●●First Line of Defence: Front office business units and individuals identify and manage risks in their business function that
could threaten the achievement of their objectives. They undertake risks within assigned limits of risk exposure and are
responsible and accountable for identifying, assessing and controlling the risks of the business.
Second Line of Defence: The support functions, such as, but not limited to, risk management and compliance, assess andoversee risk at the firm level, developing and maintaining risk frameworks, including firmwide policies. Each of these support
functions, in close relationship with the business, ensures that the risks of the business have been appropriately identified
and managed.
Third Line of Defence: The Internal Audit function provides independent and objective confirmation regarding the designand effectiveness of internal controls, i.e. it independently assesses the effectiveness of the processes created in the first andsecond lines of defence and provides assurance for these processes.

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Principle 5:External assurance
In its 2020 assessment of our adherence to its principles,
the PRI gave us top scores on a wide range of stewardshiprelated activities, including our responsible investment
policy, coverage and objectives, conflicts of interest
policy, governance and human resources, performance
management and rewards, personal development
and training, collaboration and promoting responsible
investment.
On every measure, we came out in the top two categories(A or A+) by comparison with our peers. Overall, we
received an A+ rating in all areas where we had any
investment business involvement. The firm was audited
by our external auditor to measure our compliance during2020 with reporting standards SSAE18 (for the US) andduring 2021 with reporting standards ISAE3402 (for the restof the world), which cover control procedures and theiradequacy, service delivery, information security and controls
over data privacy. No significant matters were raised.
Our extensive collaboration with industry organisations
ensures that we stay up to date on the range of issues
which are important to investors and the wider market
and keeps our policies and processes up to date. These
organisations include, but are not limited to, the PRI and theregulatory investment initiatives that our subsidiaries are
members of as set out in Principle 10.

Review and sign off process for our reporting
under the UK Stewardship CodeWe have brought together a number of internal teams
from across the firm, including Client Services, our Active
Ownership Group, ESG specialists, operations and membersof our global investment teams to produce this report. To
make it informative and accessible, we have used bothinternal and external resources to prepare the report.
It has been reviewed by our UK Stewardship OversightCommittee, as well as being reviewed and approved by
the UK and Group Boards, and has been signed off by ourGroup Non-Executive Director and Chairman. The processof collating information for the report has also led us toreflect on areas that may need to be developed further.

The ultimate judges of whether
our reporting is fair, balanced andunderstandable are our clients,
with whom we work closely.

Ensuring reporting is fair, balanced andunderstandable
All external material, including regular reports to clients, ourannual Sustainability Reports and stewardship reporting tomeet the requirements of local codes, is produced locallyand reviewed by the local compliance team. However theultimate judges of whether our reporting is fair, balanced
and understandable are our clients, with whom we work
closely. This includes institutional clients with whom we have
had relationships spanning decades. Reporting has evolved
over time, not only in line with market norms – including
an increased emphasis on ESG – but also as a result of ourknowledge of clients’ specific requirements. Further detailon how we communicate with clients and the process withwhich they assess our reporting is included under Principle 6.
Stewardship reporting to other codes such as Japan andSingapore are produced and reviewed by the relevantGroup companies.

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Principle 5:

Outcome
We believe our combination of internal checks andbalances, external assurance and auditors and ourwidespread involvement in industry and regulatory bodies
ensures that our policies, procedures and processes are
subject to continuous and rigorous review. To be effective,
such review has to result in action to ensure that ourpolicies, procedures and processes are kept up to date andeffective. During the year, therefore we made a number ofchanges as a result of our review and assurance processes:
●

●

●

●

Group Code of Ethics– the policy was updated to include
statements on diversity and inclusion.
Group Conflict of Interest Control Regulations – we
identified one new potential conflict which was added
to the global register along with details of consequent
control methods. We added six companies to theappendix of related group companies.
Group Engagement and Stewardship Strategy – this new
global strategy was developed during 2021, and reviewed
and approved in early 2022. The strategy formalises ourengagement and stewardship activities, ensures unity
across regions and allows us to share with the market our
global engagement commitments.

were clarified and reinforced. Additionally, insufficientmeasures to manage and address climate change andsustainability were added as issues that could trigger
votes against directors.
●

Group Environmental Policy – the policy was revised witha new framework that aligned the way our subsidiaries
consider environmental factors when conducting
business and we set a new goal of reducing greenhousegas emissions by 40% by 2030.

Other changes as a result of reviews that took place during2021 included:●●●

approval by the ESG Global Steering Committee to join
the Net Zero Asset Managers Initiative (see Principle 10);
establishment of a groupwide Diversity and Inclusion
policy (see Principle 1);
creation of a working group in our Singapore subsidiary
to build capacity and address improvements in our
processes and policies that address environmental risks inresponse to guidelines issued by the local regulator.

Group Proxy Voting Policy – as stated in Principle 2,
subsidiaries may add local addendums to the policy;
local addendums during 2021 were:– our Global Equities team updated its local proxy voting
policy to reflect the importance of ESG.
– the Stewardship and Proxy Voting OversightCommittee approved the updates to the Standards
for Exercising Voting Rights on Japanese Stocks tostrengthen the criteria for the selection of directors,
a change that will come into effect in April 2022.
Specifically, the ratio for independent outside directors
was increased, the absence of gender diversity on
boards was agreed as a possible trigger to vote against
members’ re-election (to be applied in 2023), and thestandards for the independence of outside directors

We believe our combination ofinternal checks and balances,
external assurance and auditorsand our widespread involvement
in industry and regulatory bodies
ensures that our policies, proceduresand processes are subject tocontinuous and rigorous review.
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Principle 6:
Signatories take account of client and beneficiary needs and communicate
the activities and outcomes of their stewardship and investment to them.

Context
A breakdown of our AUM by asset class and client domicile is shown in the following charts.
Assets Under Management by Asset Class6

Assets Under Management by Client Domicile6

Alternatives8 5.8%

Japan
91.6%

Multi-Asset7 6.2%

Asia ex-Japan 3.0%

Money Markets
12.6%

EMEA 2.6%

Japanese
Equity45.0%
Fixed Income
10.2%

Australia/
New Zealand 2.4%
Other 0.3%
Equity65.1%

North America 0.2%

Keeping in touch with clients is a basic duty of any asset manager and is a vital part of good stewardship. However, different
clients have different requirements. By far the largest segment of our client base is in Japan, mainly investing in equities andbuying through third-party distributors. We generally do not directly manage any assets on behalf of private clients. As aresult, we have to adopt a different approach when talking to our retail investors compared to our institutional investors.
The former require easy-to-digest material that is simple, brief and well presented. The latter expect more direct, personaland frequent communication, with the amount and timing determined by our contractual relationships.

Totals may not sum due to rounding of data at source.
‘Multi-Asset’ funds are made up of Equity and Fixed Income assets; the stewardship of each of these assets is addressed individually in this report.
‘Alternatives’ constitutes REITs, Equity Long/Short and Infrastructure funds. Infrastructure represents 0.2% of group AUM and is managed by external managers. These managers are subject
to Nikko AM’s external manager due diligence process, which includes a review of ESG policies.
Data as at 31 December 2021.
6
7

8

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Principle 6:

We believe most of our clients are best served taking a
medium- to long-term view of their investments. For retailinvestors, we would argue this fits their need for long-termsavings and best allows them to ride out the fluctuations
in financial markets, thus maximising the value they canobtain from investing in securities. The same considerations
apply to the majority of our institutional strategies, which
are typically aimed at pension funds, insurance companies,
banks, and sovereign wealth funds, which have longterm horizons. These perspectives are reflected in ourcommunications with clients, which tend to focus on
trying to explain long-term economic and market trends,
including, but not limited to, demographic shifts and thefate of globalisation in a less open world. They are reflected
too in our policy of integrating climate change and other
ESG considerations into the investment processes.
We manage a number of money market funds, which holdmore immediately liquid investments. These funds are typicallyinvested for short periods, normally no longer than a few
months.
We believe that this combined range of products andstrategies aligns well with the needs of our clients.

Activity
Accountability to our clients is at the heart of our fiduciary
principles and communication is therefore crucial. For
all clients, this means providing easy-to-understandmaterials that explain our investment approach, productrisk characteristics and fees, as well as tools that help
them understand their investments and the risks involved.
As is stated within the Context section above, a large
segment of our assets are managed for retail investors via
intermediaries and, in terms of geographic location, themajority of our clients are based in Japan. In this section
we have therefore provided particular focus on ourcommunication with this segment of our client base.
The COVID-19 pandemic changed the way wecommunicate with our clients. It made holding traditional
face-to-face seminars and meetings difficult during large
parts of 2021, but we acted ahead of industry competitors
in Japan to implement initiatives to communicate withthe market. We have received positive feedback from ourclients about our efforts to provide customer support –including support for our distributors by publishing market
information aimed at retail investors – despite the difficult
circumstances. Working with distributors and others, wequickly established the infrastructure needed to handle
events remotely during the pandemic by setting up digitalseminars and training sessions. This enabled us to provide

customer support without in-person meetings. We werealso able to help distributors in their efforts to service
their retail customers by supplying them with information
quickly, accurately and concisely through a wide rangeof media. As a result of our active promotion of remoteseminars and training sessions since lockdown began, we
have built up a hybrid communications strategy using bothtraditional in-person and on-line approaches that is bothrobust in the face of widespread disruption and allows
greater flexibility and breadth of content in our interactions
with clients.

Retail investors
We have a large number of mutual funds which are soldthrough banks and other distributors to retail as well as
institutional investors in Japan. We therefore put a great
deal of effort into timely, understandable and accessible
communications with Japanese retail investors. As we donot sell directly to them, our communications efforts arein part directed at our distributors: banks, brokers and,increasingly, internet-based groups.
We provide a wide range of information to distributors
and Japanese retail buyers of investment funds, notonly concerning the specific funds in question but also
related to broader themes, such as the economy andwider markets. Our aim with our communications aimed
at retail investors is to ensure they understand what ishappening with their own investments and the reasons,while fostering a deeper understanding of markets andinvestment trends.
Realising that there are wide differences in the level offinancial sophistication amongst our retail investors, wetailor our communications to our differing audiences.
Thus we provide videos on our website aimed at both
distributors and end investors. For example, we might
support a particular fund with:●videos that explain the concept of the fund;●videos aimed at first-time viewers to promote the fund;●regular videos and other materials that keep the clients
up to date with performance and underlying factors that
affect the fundWe also put a great deal of effort into webinars, online
educational courses and training for distributors and end
investors, an effort we have stepped up since the onset ofthe pandemic. Under our Nikko AM Fund Academy brand,
we provide what we deem to be essential fund-related
knowledge and information for our retail investors anddistributors and also for non-customers.

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Principle 6:

Regular Material produced under the Nikko AM Fund Academy brand
Frequency

Additional
Information

Rakuyomi (Easy 5 Minute Briefing)

Twice weekly

110 released in 2021

Koyomi (Quick Soundbites)

Monthly

Gokuyomi (Deep Dive)Monthly

Market 5 Minutes

Monthly

Weekly Market

WeeklyDate Watch

WeeklyFollow-up Memo

Ad-hocGlobal REIT Weekly

WeeklyMonthly Market

Monthly

Japan in Motion

Quarterly

Global Equity Overview

Ad-hocNikko AM Newsletter

Ad-hoc3 released in 2021

China Insight

Ad-hoc13 released in 2021

Kamiyama Reports (Market update reports by our Chief Strategist, Naoki Kamiyama)Ad-hoc23 released in 2021

Kamiyama Seconds! (Quick updates by Naoki Kamiyama)Ad-hoc49 released in 2021

Why should we invest?

Ad-hoc7 released in 2021

Our retail communications efforts regularly receive
favourable endorsement from third parties:●●

The latest distributor survey conducted by Greenwich
Associates, a leading financial services benchmarking
company, showed Nikko AM as number one in Japanin relationship management and marketing. Overall,
we were rated either number one or within the top
three by distributors, whether banks, brokers orinternet banks and brokers.
For the third year in a row, we were placed first in the latest
mutual fund company satisfaction survey by Rating andInvestment Information, Japan’s largest rating agency.

●●

3 released in 2021

We were similarly ranked number one in last year’s
branding survey by Nikkin, the Japanese news agency, thethird year we have taken top position.
We were also placed first last year in the latest asset
manager branding survey by MaDo, a major financial
publication in Japan.

We believe the results of these surveys represent a weighty
vote of confidence from intermediaries and commentatorsin the quality of our customer support, as well as how andwhat we communicate to the market.

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Principle 6:

Institutional Investors
Our communications with institutional investors are, bynecessity, much more sophisticated and individual thanthose with retail investors. It is our policy as a group to
tailor the frequency and method of communication withinstitutional clients to meet their specific requirements. These
are typically discussed and agreed as part of negotiations
when the investment management agreement is set up, but
the heart of our communications with institutional clients isour direct discussions. Our sales directors and client services
teams work with clients to confirm the required content andtiming for all regular client reports. In addition, we scheduleinvestment reviews at least annually, and can arrange ad hoc
meetings as required by the client.

able to provide reports on carbon intensity and othercarbon-related disclosures, ESG scores, and other related
information, for the companies in which we invest.

Outside of a client’s regular performance reviews, we takea proactive approach to ensuring clients are kept up todate with important information affecting their portfolios,
including any changes to their mandates or significant
market events which may affect performance.

In addition, we hold corporate sustainability meetings withclients, typically on an annual basis, to report on our broader
sustainability initiatives that encompass not only investments
but also other activities at the corporate level. Such discussions
often involve an exchange of ideas as to what asset managers
and asset owners can and should do to fulfil their fiduciary
responsibilities and contribute to the betterment of the society.

Regular meetings with our institutional clients are a twoway process. As well as the normal discussions and reportson performance, we provide explanations of a wide range
of investment-related topics in answer to client queries.
With most of our institutional clients, we hold dedicatedstewardship meetings once a year, although we mayreport on proxy voting, company engagement and otherstewardship activities more frequently as clients require.
Before these meetings, we typically submit information
on a range of topics, including our stewardship policy,
implementation framework, company engagements
and their effect, and third-party assessments of our ESG
integration and stewardship activities (for example, thelatest United Nations’ Principles for Responsible Investment
Assessment). To meet clients’ requirements, we are alsoThis allows us to focus our stewardship discussions on
topics that may be of particular interest to those clients.
We explain our voting decisions in some detail, including
how we dealt with specific proposals and, in particular,
where we voted against management proposals. We also
discuss occasions where views within the firm differed andhow internal consensus was reached. (How we cast our
proxy votes and the number of company engagements weundertook during the year are disclosed on our website.)

We are always keen to understand the investment andstewardship principles our clients wish us to adopt whenmanaging their assets and in return we explain the firm’s
policies and approach to implementation. Should there be
any misalignment between the two views, we try to reconcile
the differences with the aid of the Stewardship and Proxy
Voting Committee’s secretariat or other relevant specialists.
Our aim is to be flexible when making any necessary
amendments to the policy. For instance, when required byequity clients, we will adopt their policies on proxy voting or
engagements. For segregated mandates, where possible weare happy to implement client-supplied lists of investments
to be restricted or excluded and will tailor our investment
approach to meet their specific requirements.

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Principle 6:

Tailoring our engagement to client needs
An example of where we responded to client demands arose last year when one of our UK pension fund clients in our
global equity strategy told us they intended to become a signatory to the UK Stewardship Code. To better understand
how we could help the client meet the requirements of the Code, our investment and Client Services teams discussedwith them the key ESG themes that they prioritise under their stewardship and responsible investment policies. As aresult, we provided them with information on our company engagements related to those themes that had taken place
during the year, with a view to this information being incorporated in their submission. The investment team has alsodecided to focus on these specific themes in future engagements with investee companies in order to ensure that we
continue to be able to meet the needs of this pension fund client.
Through such discussions, we confirm that both we andour clients understand each other on the topics raised
and subsequently try to ensure that their views are sharedwith all the relevant people within the firm, particularly theinvestment team. In order to maintain close communication
with our clients, we focus on face-to-face interaction
via on- or off-line meetings, although we also use othermethods of communication. Our client-facing personnel
spare no effort in seeking detailed feedback, confirming
whether our explanations given at meetings were sufficientand generally ensuring that clients’ expectations andrequirements have been met.
Our compliance department provides an independent
check on whether investment portfolios are adhering toclients’ investment policies and the relevant guidelines.
Where necessary, it will discuss its review findings andany operational issues that need to be addressed with theinvestment teams, local management and head office.
Our non-Japanese investment teams maintain an active
dialogue with our Japanese clients via our Tokyo-basedclient service team. We supply monthly investment
positioning and performance reports, as well as market
outlook updates. The client service team offers the first
response to client requests about their portfolios andmany of these are subsequently fed through to the teamson the ground for a further response. Portfolio managers
typically visit Japan on a regular basis and, in addition
to updating clients on their portfolios during investor
meetings, they will also offer educational workshops. For
example, our Global Fixed Income team offers seminars
on European markets and the Danish mortgage bondmarket to clients and prospective clients. Some clients
have also sent their representatives to London as a meansof learning about the market and its day-to-day workings.
These contacts strengthen our dialogue with clients andour understanding of their needs.

OutcomeGiven that our core client base is in the intermediarysegment, it is harder for us than some other asset managers
to assess the effectiveness of our communications withthe retail market. However, we take comfort in the highrankings we regularly receive in the three most influential

independent industry surveys in Japan, described above.
Similarly, we feel our high rating in the Greenwich
Associates Japan survey is testimony to our success ingetting our message across to retail clients.
In terms of institutional clients, we make it a regular pointat our client meetings to ask whether clients feel that they
still understand the investment strategy we adopt for themand whether it continues to meet their needs. Beyond
that, we are constantly seeking clients’ comments on thescope and quality of the services we provide, as well as theirdegree of satisfaction with our investment results. This canbe through separate feedback sessions or during the courseof our regular communication with clients – portfolio andoperational review meetings conducted by our client
services teams are another important feedback point. Someof our institutional clients formally evaluate their third-party
managers, such as ourselves, and assign scores. We always
value such feedback from clients as it enables us to moreobjectively evaluate the effectiveness of the service weprovide and highlight areas where we can improve.
In the light of clients’ views, we are very ready to makechanges to the strategies we employ, for instance, bystrengthening our ESG integration or using additional
investment techniques (e.g. derivatives) to better meetclients’ needs. By the same token, we constantly strive
to enhance our regular reporting on our investment or
stewardship activities to meet clients’ demands.
There were only very rare instances during the year when
there were breaches of clients’ investment policies. Breaches
sometimes occurred when, for instance, instruments werereclassified during the holding period so that they no longer
fell within the original category, or the classification was
ambiguous so that the definition was not clear enough to
avoid different interpretations, or due to external factors
outside of our control, such as market movements or
brokers’ allocation of new issuance securities. In all such
instances, we immediately addressed the situation byclarifying the cause, taking the necessary remedial steps,
and implementing preventive measures. In such cases,
we provide a full explanation to our clients, in line withregulatory requirements and best practice and, if necessary,
make additional efforts to eliminate any future ambiguity inthe interpretation of clients’ investment policies.

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

Context
As we stated under Principle 1, we strongly believe that stewardship, including fiduciary and ESG
considerations, are inherent to long-term corporate value creation and contribute to the realisationof sustainable economic growth. We therefore see ESG issues as an integral part of our fiduciary
duty to clients and incorporate ESG principles in all our investment processes.
We do not adopt a one-size-fits-all approach to integration. The main responsibility for implementing
our fiduciary duties falls on our investment teams and they are given a remit to act in the best interestof our clients within the global and local governance frameworks provided by the Group. This meansthat our ESG integration and engagement processes are bespoke to each investment team, ensuring
each chooses the methods most appropriate and effective for them. Where appropriate to the asset
class, investment strategy and client requirements, certain investment teams may maintain specific ESG
policies and procedures pertaining to their investment philosophy and process.

Allowing for asset classand regional differences,
our Global ESG Steering
Committee is responsible
for monitoring andimproving the investment
teams’ implementation of
stewardship principles.

Allowing for asset class and regional differences, our Global ESG Steering Committee is responsible
for monitoring and improving the investment teams’ implementation of stewardship principles.
Whilst the approaches may differ, the process ensures there is consistency across the firm. We
believe that this structure enables us to serve the best interests of our clients.
ESG issues are rarely the only consideration when making investment decisions, but anunderstanding of these issues informs the investment process, gives our investment teams
a more rounded view of companies and may help identify companies with improving ESG
practices. Individual investment teams tailor their ESG policies and procedures according to theirinvestment philosophy and process, asset class, investment strategy and client requirements.
Relevant ESG factors include (but are not limited to) those related to environment, climatechange, human rights and labour standards, talent management, product safety, diversity,board structure and independence, alignment of remuneration, transparency of ownership andcontrol, and accounting.
In addition to our own policies and considerations, certain issues may be given priority as a resultof client feedback from our institutional clients, either at the inception of a mandate or as the
mandate evolves over time. We continue an active dialogue with our service providers, making
clear to them our ESG priorities. For example, during our annual review with ISS, who provide us
with analysis on proxy voting resolutions, we share any updates to our responsible investment andvoting policies. Further information on how we interact with and assess service providers can befound in our response to Principles 8 and 12.

The main responsibility for implementing ourfiduciary duties falls on our investment teams andthey are given a remit to act in the best interest of
our clients within the global and local governanceframeworks provided by the Group.

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Principle 7:

Climate Change
Firmwide, we recognise climate change as oneof the greatest challenges the global community
faces and consider it a fiduciary principle that
we must address when managing our clients’assets. We reinforced our commitment to thisprinciple and outlined our approach to climatechange in 2019, when we published our Position
Statement on Climate Change. The statement
contains the four building blocks of our strategy:
1. develop internal capacity;.
2. collaborate with the investment community;
3. active stewardship;
4. report on our activities.
While these are the outlines of our approach, we
do not seek to regulate how each investment
team puts principle into practice in their own
investment processes. However, in all cases we
do believe that active dialogue and exercising
voting rights on climate change, whereappropriate, can lead to positive outcomes
for the investee companies, our clients andour firm. We participate in relevant corporate
engagement activities, such as the Climate
Action 100+, to communicate our expectations
to investee companies (see Principle 10 for moreon our collaborative engagement activities).
In line with the recommendations of the Task
Force on Climate-Related Disclosures (TCFD), we
encourage our investee companies to take thefollowing steps:●●●

identify material climate change risks
and opportunities in a range of scenarios(including where the global temperaturerise is kept below 2°C) over appropriate time
horizons;
integrate material climate change risks andopportunities into their overall businessstrategy and risk management;
disclose their management policies andprocesses toward meeting the goals – andresulting performance – that emerge from theabove activities.

We are also actively exploring research tools tomonitor the resilience of our portfolios under arange of climate-related scenarios. Whilst there
has been significant progress on improving
data, there are still some limitations with data

quality and coverage, especially for emerging
markets. Nevertheless, we will continue to workon improving data, exploring relevant tools andevolving our disclosures.
We generally do not apply blanket exclusions ofinvestments based on climate change factors,
unless directed by our clients. We prefer active
engagement and the exercise of voting rights,
which we see as more effective in upholding
ESG and stewardship standards, whether it befor our clients, for the broader economy or forthe environment. We believe that exclusions
based on formulaic filters to determine climate
risks can be inflexible and fail to capture thefuture potential of companies to respond to thetransition to a low-carbon economy.

We believe that thoroughresearch and vigorous
debate within theteams, as well as direct
engagement withcompanies to get a firsthand appreciation of theissues, are still the best
ways to evaluate ESG
factors and judge theirimpact on investment
outcomes.

We believe that thorough research andvigorous debate within the teams, as well as
direct engagement with companies to get afirst-hand appreciation of the issues, are still thebest ways to evaluate ESG factors and judge
their impact on investment outcomes. We also
recognise that climate-related impacts arecomplex and uncertain, so we need to keep
abreast of scientific findings and information,and how regulators and stakeholders are
responding to them.
While we take account of climate change
considerations in our portfolios, we also workwith clients to provide low-carbon investment
solutions aligned with their specific investment
beliefs. For example, our Green Bond fund is a
low-carbon collective investment that invests insecurities that finance climate change mitigation
and adaptation projects, ensuring the highest
level of transparency for investors who want toavoid “greenwashing”. Launched in 2010, thestrategy targets global AAA-rated sovereigns,
supranationals and agencies with the strongest
sustainable development credentials, such as
bonds issued by the Asian Development Bankand European Investment Bank. In 2021 we also
launched a Hydrogen Fund managed by our
UK-based Global Equity team, which enables
our clients to participate in the financing of thegreen hydrogen economy and the transition
away from fossil fuels. More detail on ourconsideration and management of climate risk
can be found in our TCFD Report on our website.

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Principle 7:

Activity
The investment teams in our actively-managed strategies
identify attractive stocks through in-depth bottom-up
research, based on their own philosophy and approach.
ESG factors and the risks and opportunities they present
for the stock or bond are integrated into this process,providing additional considerations in stock selection.
ESG factors are thus rooted in our investment
philosophies and processes and not treated as being partof a separate exercise. We strongly believe that attention
to ESG is just a part of good investment discipline – core
to any business and inherent to its long-term value
creation, while contributing to the realisation of wider
sustainable economic growth. Given this view, we
endeavour to incorporate ESG considerations across all
asset classes and geographies.
Having said that, different asset classes have different dynamics,
with varied geographies and industry sectors adding to thecomplexity. Each of our investment teams is therefore allowed
to view ESG implementation through its own lens, leading
to diverse approaches across the organisation. Whatever theapproach, we strive to apply all ESG policies to the highest
standard, continually seeking improvement and innovation.

ESG risk analysis is integrated within the investment
research function rather than outsourced to a separate
team. Each investment team is responsible for theassessment of risks that may affect the success and longterm sustainability of holdings in the portfolio. Our detailed
process – including stress-testing investment candidates,
stock selection and portfolio construction – also helps
to ensure that the whole investment team is engaged inmanaging ESG risks.
ESG specialists support the investment teams as part of ouraim of having all investment professionals integrate ESG into
their investment processes to the fullest extent. They alsobuild relationships with various ESG-focused organisations
and regularly share information with the ESG Global
Steering Committee on developments such as ESG-related
legal changes in countries around the world. In addition,
each of our regional offices is required to present its ESG
implementation activities to its respective board.
The table below gives a brief overview of the approachtaken to ESG integration as applied across the various asset
types and geographies that we manage.

Asset class

How we integrate ESG and stewardship responsibilities within the investment process

Japanese Equities

●

●

●

●

●

Global Equities

●

●

●

●

●

●

ESG factors incorporated within the “Creating Shared Value (CSV) evaluations” performed duringinitial and ongoing company due diligence.
Engaging constructively with company management in relation to our key themes (E: Action
for a Decarbonized Society, S: Human Capital and Productivity, G: Effective Governance).
Exercising voting rights, including voting against director appointments where the firm faces serious
climate-change-related risks or sustainability issues, its initiatives to address them are deemed
insufficient and the situation is not deemed to be improving.
See the “How we integrate ESG in Japanese Equity portfolios” case study for more on our
approach to Japanese Equities.
Proxy voting is executed in the interest of our clients in line with our proxy voting guidelines.
ESG analysis is undertaken by each portfolio manager and fully integrated into the stock-picking
process to ensure we can robustly evaluate the materiality of each factor and its potential
impact in the future.
Our four-pillar “Future Quality” analysis includes in-depth evaluations of ESG factors to determine
their effect on the company’s risks and returns.
Research includes an analysis of a company’s corporate governance, social practices, theenvironmental sustainability of its products or services and its capacity to fund its growth and
ESG commitments.
Our investment team engages with investee companies to help promote better ESG
practices if we believe there is room for standards to improve. This includes ESG controversies
identified by the Global Equity team.
MSCI validates our ESG analysis by scoring our Global Equity portfolio, which is rated AAA as at
the end of December 2021.
Proxy voting is executed in the interest of our clients in line with our proxy voting guidelines.

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Principle 7:

Asset class

How we integrate ESG and stewardship responsibilities within the investment process

Asia ex-Japan Equities

●

●

●

●

●

●

●

New Zealand Equities

●

●

●

●

Global Fixed Income●●

Asian Fixed Income

●

●

●

●

New Zealand Fixed
Income●●●Money Markets●

ESG materiality matrix applied to company using ESG factors from the Sustainability AccountingStandards Board and MSCIESG analysis incorporated in company research, security selection and portfolio construction.
Our ESG “Materiality Map” focuses on the material issues and opportunities for each of thecompanies we cover (see “Case study: improving ESG factors in a palm oil producer”).
ESG-focused research is used to identify areas for company engagement and improvement.
An acceptable ESG standard is not the sole determinant for investment, however where
negative ESG issues are identified with little or no evidence that corrective measures are being
taken, the company is excluded from investment consideration.
For existing holdings, an indication of material deterioration in ESG factors may lead to a rating
downgrade and subsequent sale from the portfolio.
Proxy voting is executed in the interest of our clients in line with our proxy voting guidelines.
The team seeks to understand how industry and company ESG factors may impact investments
and ultimately client portfolios.
ESG factors are considered as one aspect of the overall analysis to build a picture of the risks andopportunities faced by a company.
Portfolio companies with low ESG scores are targeted for engagement in an effort to lift the barin weak areas or where improvement would be beneficial to stakeholders.
Proxy voting is executed in the interest of our clients in line with our proxy voting guidelines
The majority of fixed income assets managed by the investment team are in AAA-rated bonds.
Particularly in the case of corporate credit, ESG factors are considered to the extent that they are
deemed material to the investment case and in line with our Japanese clients’ risk appetite andperspectives on ESG investing.
In relation to our holdings in sovereign entities and major banks, we maintain an active
dialogue on ESG themes as a means of building our insight and market intelligence.
ESG materiality matrix applied to company using ESG factors based on the Sustainability
Accounting Standards Board and MSCI but enhanced to reflect conditions in Asia
ESG analysis incorporated into all company research and portfolio construction. ESG-focusedresearch is used to identify areas for company engagement.
An acceptable ESG standard is never the sole determinant for investment, however where
negative material ESG issues are identified and we do not believe that corrective measures will
be taken, the company is excluded from investment consideration.
For existing holdings, an indication of material deterioration in ESG factors may lead to a rating
downgrade and potential subsequent sale from the portfolio.
The team seeks to understand how industry and company ESG factors may affect investments
and, ultimately, client portfolios.
ESG factors are incorporated into the due diligence process to provide an overall picture of therisks and opportunities faced by issuers.
The team engages with portfolio companies with low ESG scores in an effort to seek
improvements that would be beneficial to stakeholders.
ESG and stewardship considerations are considered within the issuer selection process to theextent that they are deemed material to the investment case and in line with our underlying
clients’ risk appetites. See “Money Market Funds: Pandemic-Induced Interest Rate Changes”
within principle 4 for information on our approach to fiduciary duty to our clients.

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Principle 7:

How we integrate ESG in Japanese Equity
portfolios
Our largest asset class in terms of assets undermanagement is Japanese Equities. ESG is integrated into
all investment decisions in these portfolios through theuse of a selection process which uses Creating Shared
Value (CSV) evaluations.
CSV evaluations use the work of Harvard University
Professor Michael Porter which found that the creationof social value leads to economic value. We have used
CSV evaluations of firms as part of our investment
process since 2013, incorporating the ESG factors ofdiversity, management ability to execute, contribution
to the environment and society, and threats to business
continuity. These are integrated with Porter’s original Five
Forces (which fall within the “competitiveness” category) –barriers to entry, threat of substitutes, bargaining power ofcustomers and suppliers and competitive rivalry – together
with an evaluation of financial strength and returns toshareholders (“financial strength”). Our CSV evaluations
currently comprise 12 factors grouped into three
categories: competitiveness, ESG, and financial strength.
We have most recently updated the factors, increasingfrom four ESG factors to five (new factors include humancapital, carbon neutrality, and resilience). We use the CSV
evaluation factors to determine whether a stock is at apremium, neutral or at a discount relative to the sector.
In March 2017, we launched the Active Ownership Group,a body devoted to promoting better corporate andshareholder value in the Japanese companies in which weinvest, including our passive strategies. These initiatives
have further improved our ability to engage with firms andexercise our voting rights in our efforts to maximise thecorporate value of firms. During 2021, the AOG engaged atotal of 4,104 times with 1,111 firms.
In March 2021 the AOG established three ESG priorities(published on our web site as “Nikko AM’s Key ESG
Themes”) for engagement with our Japanese equity

investments which we believe will contribute to better
investment returns in the medium- to long-term. They arelisted below with the background to each one:
Environment – Action for a decarbonised society:
The shift toward a decarbonised society is creating growth
opportunities for companies with environmentally-friendly
technologies. At the same time, decarbonisation andother such changes put companies at risk of potential costrises, while their brand power may be damaged if they failto take sufficient action. This is making decarbonisation
increasingly important as a driving force behind future
corporate value. We use our engagement to urge firms toaddress these changes, for example by allocating businessresources to related fields and preparing for the associatedrisks. Our analyses of companies’ actions in this area arepivotal to our assessments of their corporate value.
Social – Human capital and productivity: The way
companies use human capital is clearly important to theirmedium- to long-term earnings and corporate value,
and it will become increasingly crucial as populations
age further and birth rates continue to fall. Following
the COVID-19 pandemic, reconsiderations of working
styles and the need for flexible responses to similar
environmental changes have also driven improvements incorporate sustainability. Deepening our engagement andanalyses with a focus on companies’ personnel strategies
and systems, as well as their labour productivity, is anotherway in which we are helping to enhance corporate value.
Governance – Effective governance: Thanks in part to
the Corporate Governance Code, Japanese companies
have made great strides in developing their governanceframeworks. We continue to urge companies to increase theircorporate value even further through sustained development
and enhancement of their governance frameworks. Our
engagement covers the appropriateness of their long-term
visions and management strategies, their ability to put theseplans into practice, and the effectiveness of their oversightand advisory functions.

OutcomeWe think the best way to demonstrate the practicaloutcome of the way we integrate stewardship into
our investment activities, and particularly ESG issues,is through some examples. Therefore, we have included
a number of case studies that illustrate how information
gathered through engagement and active ownershipduring 2021 has helped inform investment decisions.

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Principle 7:Case study: improving ESG factors at a palm oil producer (Asia ex Japan Equity)
We aim to identify companies where ESG factors are improving, as there is scope for an uplift in valuation as the improvements become evident
to the market. An example is the history of our investment in Wilmar International, a Singapore-based agribusiness which is held within our Asia
ex-Japan Equity portfolios.
Issue: As a leading palm oil plantation owner, refiner and distributor, the company operates in a highly controversial sector. It faces a number ofmaterial ESG issues, including carbon emissions, land conservation and labour practices. The diagram below illustrates the investment team’s ESG
Materiality Map for the company.
Engagement: We have been engaging with the company directly and as a member of the PRI’s investor working group on sustainable palm oil
since 2018. In the intervening years, we have seen big improvements in the company’s engagement with ESG. These have included addressing
deforestation, winning certification from the Roundtable on Sustainable Palm Oil (a stakeholder industry group), ensuring traceability in its
supply chain and aiding development in the communities from which its labour is sourced. We have also witnessed a substantial improvementin the company’s attempts to improve food safety and nutrition practices, which we had previously highlighted as an area where there was anopportunity to improve sustainability.
Independent endorsement for the company’s efforts – and the success of our engagement – came when Wilmar was included in the Dow
Jones Sustainability Index as a sustainability leader in 2020. At a meeting in 2021, we spoke further with company representatives about theirsustainability practices, ESG journey and their continuous efforts in engagement and transparency that has contributed to their inclusion in the
Dow Jones Sustainability rankings. We also discussed their efforts in social opportunity in food safety and sustainability.
Outcome: During the meeting in 2021, Wilmar addressed some of our previous concerns which led to an upgrade to the investment thesis underthe “Social” pillar of our ESG matrix. Their progress in certain ESG-focused areas, particularly in Social (food safety) gives us confidence that there will
be further improvements on these fronts. As a result of this, we increased our position in the stock.
ESG Materiality Map
Environmental Pillar (50%)
ClimateChangeEmissions& Energy
Management
Product
Emissions
Footprint
Financing
Envionmental
ImpactClimateChangeVulnerability

Nature Capital

Pollution& WasteManagement

Social Pillar (30%)
Environmental
Opportunities

Human Capital

Product
Liability

Water

Toxic
Emissions &Waste

Clean Tech

LabourManagement&
Development

Product
Safety &QualityLand

Packaging
Material &Waste

Green Building

Equal
Opportunities

Customer
WelfareBiodiversity

Electronic
Waste

Renewables

Health & Safety

Privacy& DataSecurity

Opportunities
in Health &Wellbeing

Board

AntiCompetitive
Practices

Supply Chain
Management

Responsible
Investment

Community
Development

Pay

Corruption &Instability

Accounting
Practices

Past
Transactions

Resource
Management

Financial
SystemInstability
Primary Risks

Issues which can put a company out of business

Secondary Risks Issues which can have a material impact on shareholder return
Opportunities

SocialOpportunities

Governance Pillar (20%)
Corporate
GovernanceCorporate
Behaviour

Beneficial Ownership
Access to Basic
Assessment (Individual, SOE
Services (Food,or Capital Market)
Healthcare,Finance, Power,
Communications, Treatment
Business Ethics
Education)of Minorities

Governance
Opportunities
Ownership &Management
ChangeMinority
interest
Alignment
PrincipalAgency
Alignment

Transparency& Disclosure

Issues which can lead to a material enhancement in shareholder returns

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Principle 7:Case study: a palm oil producer that is destroying value with poor ESG standards (Asia Fixed Income)We hold IOI Corp bonds in our Asia Fixed Income portfolios. Based in Malaysia, it is one of the largest palm oil producers in the world, with operations
encompassing plantations, mills, refineries, specialty fats and oleochemical operations. The company’s plantation business is in both Malaysia andIndonesia and has a land bank of more than 230,000 hectares. Last year, the company announced a bond issue. Our Asia Fixed Income team had todecide whether we wanted to participate.
From a financial point of view, IOI has a robust credit profile and is rated BBB-. It has a long track record of strong cash generation, with high interest
coverage ratios. These financial strengths are partially offset by the company’s high earnings correlation with commodity cycles.
Issue: IOI Corp has periodically been embroiled in ESG-related controversies surrounding its palm oil plantations and the health and safety
standards of its workers. The company was recently accused of using forced labour by an activist group, an allegation which remained unresolved
at the time of last year’s bond issue.
In March 2016, IOI lost its certification from the Roundtable for Sustainable Palm Oil (RSPO), a stakeholder industry group. RSPO ruled that IOI
was not meeting the certificate’s standards by ensuring adequate protection for areas of peat in the forested areas it owns. The ruling resulted inlarge multinationals dropping IOI from its approved list of suppliers (for example, Kellogg’s, Unilever and Mars). IOI responded swiftly by carryingout remediation work to rectify its processes and restore its full compliance with RSPO standards. RSPO subsequently reinstated IOI’s licence inAugust 2016.
Outcome: Despite the remedial action taken by the company and its strong balance sheet, our Asia Fixed Income team was worried that the RSPO
suspension would have a lasting impact on the company’s reputation, affecting both its operations and credit profile. We did not feel our concerns
were properly reflected in the pricing of the bonds in 2021’s new issue. This was reflected in our ESG evaluation and we decided not to participate.
Key ESG factors considered in the investment process of our Asia Fixed Income team
Environment

SocialGovernance

Carbon Emissions

Product Carbon
Footprint

Labour Management

Health & Safety

Board

Pay

Financing
Environmental Impact

Climate Change
Vulnerability

Human Capital
Development

Supply Chain Labor
Standards

Ownership

Accounting

Water Stress

Biodiversity & Land
Use

Product Safety &Quality

Chemial Safety

Business Ethics

Anti-Competitive
Practices

Raw Material
Sourcing

Toxic Emissions &Waste

Financial Product
SafetyPrivacy & Data
Security

Corruption &Instability

Financial System
Instability

Packaging Material &Waste

Electronic Waste

Responsible
Investment

Insuring Health &Demographics

Tax Transparency

Ownership & Mgmt
ChangeOpportunities in
Clean Tech

Opportunities inGreen Building

Controversial
Sourcing

Access to
Communication

Minority Interest
Alignment

Principal-Agency
Alignment

Access to Finance

Access to Healthcare

Opportunities in
Renewable Energy

Regulator Track
RecordOpportunities in Nutrition& Health(Reference: Sustainability Accounting Standards Board, MSCI)

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Principle 7:Case study: giving credit for active engagement in ESG(Asia Fixed Income)Our Asia Fixed Income portfolios hold bonds issued by RelianceIndustries, a large Indian conglomerate with a presence in the refining
and marketing, petrochemical, digital services and retail businesses.
Issue: As part of the research process carried out for our Asia Fixed
Income portfolios, we identify the ESG issues most relevant for thecompany while taking account of the nature of the business andthe materiality of the issues for the overall sector. In our analysis,
we will tend to favour companies that are proactive in managing
ESG issues and are implementing changes that encourage longerterm growth. We will tend to be cautious about those at risk offalling behind.
Reliance Industries is an example of a company making progress on
ESG. The key ESG factor applicable to the company is greenhouse gas
emissions (which fall under our “Environment pillar”) as a result of its
involvement in the fossil fuel industry. This exposes the company to risks
from the transition to greener energy.
Following our analysis, we found that Reliance has been actively
diversifying its business by building a sizeable presence in retail anddigital services. The company now boasts a diversified business with

Case study: Nikko AM as gateway to a greener Danish
mortgage market (Global Fixed Income)
The Danish mortgage bond market dates back to the end of the 18th
century. It is unique in its age and size, being significantly larger thanthe Danish government bond market. It is typically AAA-rated andhas no high-yield or sub-prime sectors. Local market practices provide
high levels of security amongst individual bonds, whilst the market has
proved to be robust and resilient in both favourable and difficult market
conditions. The market takes great pride in the fact that no bond has everdefaulted throughout its history.
Issue: As stewards of our clients’ capital, we see ourselves as a bridge
between Japanese investors and this very attractive market. While
investors’ main concern is to ensure that their Danish portfolios help
improve diversification and income relative to their Japanese holdings,
they also need confirmation that their holdings have been wellmanaged in the context of the local opportunity.
Our Global Fixed Income investment team has built extensive experiencein the market, having researched and invested in it for over five years. We
were instrumental in encouraging Nycredit, a Danish bank, to design anindex of Danish bonds hedged back into Japanese yen as a benchmark
for Japanese investors with holdings in this market. We continue tomaintain a dialogue with the index provider on behalf of our clients.
We have also engaged in extensive discussions with Japanese financial

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a large presence in the Indian domestic market and has gradually
reduced its reliance on the oil refining business. In 2021, the company
also announced a $10 billion capital spending programme in clean
energy investments to be rolled out over the next three years andan ambitious target to be carbon neutral by 2035. The company also
improved its ESG reporting by announcing that it would adhere tointernational reporting frameworks, such as the Task Force on Climaterelated Financial Disclosures.
With its good track record in business execution and strong balance
sheet, we are optimistic that Reliance will be successful in its plans to
mitigate energy transition risks. The company is also capitalising on
new business opportunities with large investments in the renewable
and clean energy sectors. These will help to sustain the company’s
long-term financial performance and enhance its overall ESG profile,whilst playing an important role in supporting energy transition inIndia. External validation of these improvements came when thecompany’s MSCI ESG score was upgraded by one notch in 2021.
Outcome: The positive ESG assessments were factored into thequantitative and qualitative components of our Internal Credit Rating,
improving the overall credit rating and corresponding risk premium, andthereby justifying further investment in the company.

institutions about the opportunities that the Danish bond market offers
overseas investors. Despite the fall in yield in recent years, we have still
been able to construct portfolios for our Japanese clients that offer
diversification in terms of duration, coupon and mortgage originators, aswell as a desirable income stream over the periods being sought.
Our investment team has regular communication with Danish market
participants, as well as the central bank and other market commentators
to understand ongoing developments in the market. We are in regularcontact with the originators of mortgage bonds and market regulatory
officials to understand the current issuance of mortgage bonds and how
it might impact the market. Similarly, we maintain constant contact withdomestic Danish investors and brokers to follow the demand side of themarket. As part of our discussions with the banks last year, we suggested
that they might offer incentives through their mortgages that would
encourage their customers to improve the insulation and energy efficiencyof their homes. We also discussed how these “green mortgages” might besegmented to identify them as a sub-sector of the market.
Outcome: We will continue to be actively involved in the Danish
mortgage market in 2022, maintaining our contacts with allparticipants. We will be paying particular attention to our green
initiatives and will be monitoring the extent of their take-up
and engaging in further discussions to encourage their morewidespread adoption.

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

Activity
We use a number of outside service providers as part of our stewardship of the assets we manage.
These include MSCI, Bloomberg, ISS, Good Bankers and IR Japan for ESG information and analysis. We
also have regular meetings with external ESG analysts to improve our understanding of how they
engage with companies and thereby enhance the quality of the research we receive. Quality and depthof reports and insights are considered, as well as the effectiveness of the vendor in providing us with thenecessary insights to fulfil our stewardship obligations on behalf of our clients.
Although there is value in the data provided by our third-party providers, we treat it as supplemental to
our own analyses and believe any enhancement depends on how the information is incorporated into
the investment process. A large portion of our assets are in Japanese and Asia ex-Japan equities, as wellas fixed income assets, all of which are asset classes not well covered by third-party providers. We findthat there are gaps and data delays while, at times, we disagree with the analyses or ratings even when
they are available. We therefore do not rely exclusively on these services. We conduct all engagementwith investee companies ourselves and the decisions on how we vote are ultimately made internally.
One example in 2021 where we disagreed with the data provided by a third-party provider occurred
when an MSCI Social Controversy Score downgrade resulted in engagement with MSCI to understandthe rationale for the downgrade. Further details can be found in the case study that follows.

Case study: querying third-party ESG scoring
Deere & Company manufactures and distributes a range of agricultural, construction, forestry,
commercial and consumer equipment.
Issue: Last year Deere suffered a major strike by its US workers over pay and benefits. The strikeresulted in a significant downgrade by MSCI in Deere’s Social Controversy Score. We noted thedowngrade as part of our regular monitoring. We asked MSCI to confirm that the strike was thereason for the downgrade and, if so, why it had taken so long to feed through to the rating. We
also questioned why the company had received such a severe downgrade when the issue had
been resolved.
MSCI confirmed the downgrade was related to the strike. It explained that each company
receives an overall score based on the assessment of performance under the three headingsof environmental, social and governance. The overall score is then driven by the lowest scoringof the three. MSCI assessed the scale of the impact of the strike to be extremely widespread,
although the nature of the impact was only assessed as medium (as with most labour strikes).
Nonetheless, using MSCI methodology these scores added up to a “severe controversy”.
Although MSCI had determined that this matter had been concluded, it did say that its report
took account of controversies over the previous three years. On timing, it acknowledged thatnews of the strike had been received in October, with its conclusion following in November,
yet the downgrade was not reflected in its scores until December. MSCI assured us that its
Controversies Team was continuing its efforts to enhance its news collection and monitoringprocesses to ensure timely processing of relevant controversies.
Outcome: No change in our investment was made as a result of this engagement as it did
not result in any change in our research thesis. We will continue to monitor MSCI’s Social
Controversy Score for Deere in future years to see how it accords with our own research.

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Principle 8:

When engaging with any external service provider, we undertake an initial due diligence analysis, after which the provider
is subject to ongoing monitoring and due diligence. Each outsourcing department that owns the relationship with theapplicable external service provider undertakes an annual review of the cost, effectiveness and usage of the services received.
Vendors are also subject to anti-money-laundering and adverse media screening checks. Monitoring includes maintaining
appropriate levels of regular contact and may include regular performance assessment. The areas covered in the initial due
diligence are illustrated in the diagram below.

How we monitor service providers
Internal control system

Information security system

Management stability, industry standing, corporate culture, organisational structure

Public accreditations, licences, certifications by private certification bodies
Quality, technical capabilities, environmental friendliness and trackrecord in consigned business or similar business and reputation thereof
Outsourcing fees and payment conditions

Emergency measures, Business Continuity Managment (BCM), Business Continuity Plans (BCP)

ISS has benchmark policy guidelines which are regularly
updated. It is part of our annual review process to combine
the review of these guidelines with the annual review ofour own proxy voting policy. We then liaise with ISS if their
guidelines do not match our expectations. Our interaction
with ISS and our voting process is further detailed in our
response to Principle 12.

In 2021 we also enhanced our annual vendor due diligencequestionnaire for strategic service providers to include a
section on ESG and sustainability. For example, we requestthat vendors provide copies of any ESG/sustainability
policies or procedures which govern integration of ESG
considerations within their business activities. We also ask(amongst other things) for details of how the company
identifies and manages material ESG-related risks, uses ESG
factors to create value and how the firm promotes ESG/
sustainability awareness within their organisation. We are in
the process of rolling this out more widely across our service
providers during 2022.

We have experienced no material issues with any of ourexternal service providers during 2021.

An example of a service provider we use extensively for our
stewardship activities is ISS. We use ISS to carry out proxyvoting on our behalf. Upon receipt of any advisory researchand voting recommendations from ISS, the portfolio manager
or analyst responsible for the security in question looks at thereport and conducts further research where any issues havebeen flagged.

As illustrated by our case study, there are instances where we
disagree with the analysis provided. This is fed back to thedata provider as part of our day-to-day operations but does
not always result in reports being reissued (in the case of, say,
MSCI or ISS). We are confident that our monitoring of service
providers has ensured that services have been delivered tomeet our needs.

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

Activity
As a leading asset manager, we recognise that engagement and stewardship are part andparcel of our fiduciary duty. Active engagement with our companies is built into our investment
processes and plays an integral role in fulfilling our commitments as a good steward of thecapital that our clients have entrusted us with. While the general approach outlined here applies
to all discretionary accounts, it will be adapted to circumstances. For example, Japanese culture
may approach engagement from a different perspective than Western societies. Our strategy as
outlined here should be read in conjunction with our Commitment to Responsible Investing and
the Group Proxy Voting Policy.

Engagement Objectives
We engage with our companies on their strategy, operations and financial decisions, as wellas their performance and management with respect to material environmental, social andgovernance (ESG) issues. The purpose of our engagements is to help them attain and sustainhigh returns and create value, while becoming and remaining good corporate citizens. In carryingout our purpose, we seek to understand managements’ stance and strategy on material issues,monitor their performance on these issues and set milestones, where appropriate, and shapecorporate behaviour and influence positive change by encouraging policies such as enhanced ESG
disclosure and performance in line with best ESG practice.

We engage with ourcompanies on theirstrategy, operations andfinancial decisions, as wellas their performance andmanagement with respect
to material environmental,social and governance(ESG) issues.

Our discussions with managements often seek the rationale for their decisions and policies and,
where appropriate, commitments to address any issues raised. Three overarching principles guideour engagements:●

Materiality: our engagements are driven by material factors, including ESG factors;●

Intentionality: we establish clear objectives and expectations for our engagements;●

Effectiveness: we engage in a constructive, positive and pragmatic manner.

Engagement Methods and Execution
Our engagement methods vary, based on the needs of the situation. These methods include:●

one-on-one company dialogues, including on-site visits;●management calls and roadshows;●written communication;●

collaborative engagements.

In some parts of Asia, one-on-one engagements are often the most constructive and culturally
appropriate way to build trust, on the basis that confidentiality can bring better results than open
confrontation. Mindful of these important regional nuances and our commitment to constructive,
positive and pragmatic engagements, we carefully select our engagement methods, whilst
being committed to supporting collaborative engagements where appropriate. For more on
collaboration, see Principle 10.
Regardless of the method of engagement, we always seek to have a dialogue with the key decision
makers, including founders, chairs, independent directors and executive directors, and particularly
chief executives, chief financial officers and others whose duties include sustainability and investor
relations. If these more consensual approaches fail to achieve our desired ends, or there are more
serious failings by a company, we may escalate the matter. This could involve collaboration with otherinvestors. These approaches are discussed in more detail under Principles 11 and 10 respectively.

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Principle 9:

As discussed under Principles 1, 2, 6 and 7, ESG is integrated
into our investment process, with investment teams
engaging with our companies on relevant ESG issues both
before and during the period of investment. We do notseparate or outsource the engagements as we believe
our own analysts and portfolio managers are best placedand should be responsible for assessing ESG issues andengaging with the companies they cover. As a result, ESG
risk and opportunity are factors that form part of our buy
and sell decisions. Our active engagement makes it clear toissuers that ESG is one of our priorities.
We use several factors to decide how to prioritisecompanies for engagement, which can differ by region
and asset class. The factors that may be considered forprioritisation are:●the size of holding and/or our influence,●a poor ESG score or the scope for improvement,●

the nature of the issue and/or the severity of the breach,●materiality,●

a voting event,●

our ESG thematic priorities,●

the client’s priorities,●

the company’s openness to dialogue.

The results of our engagements supplement our investment
analysis, risk management frameworks and, consequently, ourinvestment decisions. Our principal objective, however, is toseek commitments from company managements that they
will address any material concerns raised by investment teams
as a result of our engagement. The results are logged andrevisited as we monitor companies’ progress.

Engagement by Asset Class
The type of engagement undertaken depends in part on
the asset class in question, as well as its geographic location.
Below we outline the approach adopted in the main asset
classes we manage.

Japan Equities
Our Japanese equity investment teams have a deep
understanding of local markets and the intricacies of Japanese
corporate culture, which helps us develop relationships withthe companies in which we invest. Sources of information
extend beyond written forms, such as financial statements,
sell-side research and local news flow, with managers placing
an emphasis on direct contact with company management,
including site visits. Our local presence in Tokyo, where weare one of the largest asset managers in Japan and where
the market generally tends to be under-researched by nondomestic peers, helps facilitate dialogue with companies.
Over the years, we have been able to establish strong local
relationships, providing us with unique insights, investment
opportunities that might have otherwise been overlooked
and allowing us to provide unusually far-reaching stewardship.
To supplement the research undertaken by our specialist
Japanese equity investment teams, we set up the Active
Ownership Group (AOG) in 2017 to enhance the firm’s ability to
decide how to exercise voting rights, carry out our stewardship
activities and conduct engagement with companies held in ourJapanese equity portfolios. As a result, even stocks which are only
held in passive portfolios became subject to engagement. Since
August 2021, a key focus of the AOG has been to work withportfolio managers and analysts in our research teams to engage
with large and mid-sized firms specifically on ESG issues.
The AOG’s priorities when deciding which firms to engage withare based on several stewardship considerations, including,amongst other things, ESG, corporate earnings, asset efficiency
and shareholder return. After each engagement, a report iscreated to track progress and is shared internally. Feedback isalso provided to active investment portfolio managers.
In March 2021, the AOG group established three key ESG
themes in relation to Japanese equity investments. These
are covered in more detail under Principle 7. Guided bythese themes, our assessment and dialogue with investee
companies enhances corporate value and contributes tobetter investment returns in the medium to long term.
We view the improvement of our engagement policies as an
iterative process and as a result of reviews conducted during2021, we will be rolling out further enhancements to ourJapanese Equity engagement policies during 2022.

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Principle 9:

Global Equity
When appropriate, our Global Equity investment team will engage with investee companies to help us understandhow their ESG opportunities and risks are managed. These meetings can occur at any point in the investment process– from initial research, through to portfolio inclusion and beyond. These discussions provide us with an opportunity todevelop our knowledge of each business and industry, and to take a view on the quality of management teams and theirstrategies. We will also engage to help promote better ESG practices, if we believe there is room for standards to improve.
Clients in the UK and Europe are increasingly engaging with us on matters of stewardship. During 2021, we had discussions
with UK institutional and wholesale clients on the impact of the revised UK Stewardship Code. Certain clients of our Global
Equity strategy have also requested greater focus on specific ESG themes, which has resulted in increasing emphasison these areas during investee company engagements and other regular activity, such as client reporting. Taking into
consideration clients’ engagement themes where possible is included in our new Group engagement strategy.

Global Fixed Income
In relation to corporate credit, our Global Fixed Income portfolio managers and research analysts regularly engage withcompanies in which we invest. These discussions cover the firms’ corporate earnings and financial strategies, but also
other non-financial information, including their management policies, business strategies and ESG matters, as part of anassessment of corporate value that ultimately informs our investment decisions. Where we have identified companyspecific or systemic risks, we may raise these concerns through meetings, site visits, conference calls or correspondence
in order to gain assurance that risks are being managed. We prioritise engagements based on our holding, the issue andour exposure, rather than whether we expect change and will be able to demonstrate outcomes. However, the level ofengagement depends on the asset class and the geographic region. Given our relatively small exposure to corporate
bonds and emerging markets as part of our global AUM, we are realistic about the practical limits to our influence and we
avoid situations where we might end up in corporate actions which would tie-up disproportionate resources and time.
In our Global Fixed Income portfolios, most of our assets under management are in sovereign or other AAA bonds andmoney market instruments. We also hold small shares of issuance by major banks and some leading corporates. While we
maintain an active dialogue, we see this as a means of building our insight and market intelligence as much as a form of
influence that might change the behaviour of these issuers.

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Principle 9:

Nonetheless, despite the AAA-rating of Danish mortgage
bonds, we recognise our position as a “gateway investor” forJapanese investors in this market. We therefore believe it isimportant to regularly engage with the mortgage banks inrespect of their lending practices, securitisation methods
and issuer programmes. In 2021, we discussed with them
how their lending process might support house insulationand energy efficiency amongst their borrowers and how
this might be reflected in bond issuance. We have also held
initial conversations with Danish institutions to see whether

they can segment loans based on the energy efficiencyof the borrower to create green mortgage bonds. We willrevisit that conversation in 2022. For more on this subject,see our case study under Principle 7.

OutcomeThe best way to describe the outcomes of ourengagement in the past 12 months is by a series ofexamples and case studies.

Case Study: addressing climate change at a large financial institution (Japanese Equity)
A large financial services group whose business lines include banking,trust services, securities brokerage, credit cards, and leasing. The sharesare held in our Japanese Equity portfolios.
Issue: In May 2021, the firm published its Carbon Neutrality Declaration,
which committed it for the first time to a long-term target of achieving
net-zero greenhouse gas emissions within its loan and investment
portfolio by 2050. The bank has also joined the Net-Zero Banking
Alliance, an initiative that brings together those in the banking sector
committed to moving their lending and investment portfolios to netzero emissions. The company will unveil its interim carbon neutrality
targets for 2030 this year and it will be important for investors to consider
how ambitious these are and how they are to be achieved. Given thatthe company has said it will set interim targets in line with internationalframeworks and norms, we expect that it will declare highly ambitious
and objective goals that align with the UN Paris Agreement.
Engagement: We recently held discussions with the chief sustainability
officer of the company and said we would like to see more thoroughdisclosures in two areas: 1. the firm’s policies, targets, and the resultsof its engagement with investee companies and borrowers as part ofits plans to decarbonise its loan and investment portfolio; and 2. thefirm’s assessment of decarbonisation risks in investee companies andborrowers outside of the energy and utility sectors. At its annual general
meeting, several environmental groups submitted a joint shareholder

proposal requesting that the company develop and disclose a planfor investing and lending that is aligned with the goals of the Paris
Agreement. Noting the company’s recent significant commitments
towards decarbonisation, we take a positive view of the company’s
approach to climate change and therefore opposed the proposal.
Outcome: The shareholder proposal failed to pass, with less than 23%
of votes in favour. The actions the company has taken leading up to
the proposal have been very close to meeting the demands of theshareholder resolution, which we believe explains why the resolution
did not receive higher support. As a result, we view this as a successful
outcome of joint investor action.
Follow-up: We plan to participate in a meeting with outside directors in
the first half of 2022 and to continue our dialogue with the company. We
have seen significant improvement in the company’s response to climatechange in recent years and its efforts are considered to be among thebest in the Japanese banking sector and comparable to those of global
financial groups. While we recognise that this is an area that requires
long-term, continuous improvement efforts, climate change is not
currently a negative factor in our assessment of the company, given its
approach to sustainability and commitment to listening to shareholders
and other stakeholders. In the light of that, we do not believe there is any
need for escalation at this time.

Case study: governance and board effectiveness at a medical device manufacturer (Global Equity)
LivaNova is a medical device manufacturer based in the UK in which
our Global Equity portfolios own shares.
Issue: We had a number of concerns about the company, given
management’s lack of urgency over the poor share price performance,
consistently poor communication with financial markets andinsufficient focus on delivering adequate near-term financial
performance.
Engagement: In the early part of 2021, we met the interim financedirector and investor relations representative to discuss recent boardchanges, which were encouraging. We believed the addition ofexperienced members from very credible large medical technology
companies would lead to better oversight of the executive
management. In subsequent meetings with company personnel, we

noted improved communication with the company, but stressed that
there was more to do to restore investor confidence. We also madethem fully aware of our priorities for any new permanent financedirector. Following that, we noted the improvements in reportingand financial management once the interim incumbent had been
appointed as permanent finance director
Outcome: We have seen improved communication from LivaNova’s
management while we have been actively engaging with it over thelast year. The appointment of the new finance director has given rise
to better communication and delivery of earnings guidance, resulting
in less share price volatility. As a result of these improvements, wehave made no change to our Future Quality thesis. We will continue toengage with management on a regular basis.

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Principle 9:Case study: Controversial sourcing policies at an IT company (Global Equity)
Hexagon is a global provider of design, measurement and visualisation
technologies held in our Global Equity portfolios.
Issue: MSCI had given it a low ESG score compared to rival companieson account of its sourcing policies and the lack of traceability of its raw
materials.
Engagement: We discussed the issue in early 2021 with the Headof Investor Relations and Sustainability. Since then, the company
has published its first annual sustainability report. This states thatappropriate sourcing policies are now in place, with close to 50% of
suppliers being covered by a new audit scheme introduced in 2020.
Its Conflict Minerals Policy commits it to identifying products that
may include minerals from countries where there is fighting – socalled “conflict minerals” – and extends its policy to suppliers, where
possible.It is also enjoined to take reasonable efforts to avoid theuse of raw materials that directly or indirectly finance armed groups
which violate human rights. Amongst other things, Hexagon is also

implementing a sustainability programme, a supplier qualification
process and encouraging suppliers to adopt guidance from the OECDon responsible supply chains.
Outcome: The company has published a sustainability report
including appropriate sourcing policies. We have left our investment
recommendation unchanged as a result of our engagement, with nochange to our Future Quality thesis.
Follow-up: We will continue to engage with management as part ofour regular interaction with portfolio companies. We will particularly
focus on the degree of progress by the company in auditing suppliers
when it announces its 2021 annual report and sustainability review
this year. Our belief is that these are sufficient and appropriate actions.
The MSCI Report from August 2021 upgraded its “controversial
sourcing” score for Hexagon to close to the industry average. MSCI
also gave Hexagon a top score on its commitment to avoiding
controversial materials.

Case study: dealing with safety at a medical products group (Global Equity)
Koninklijke Philips is a Dutch healthcare group held in our Global
Equity portfolios.

management had handled the issue and expected minimal long-term
damage to its market position.

Issue: In April 2021 , Phillips voluntarily recalled certain medical devices
designed to help people with a sleeping disorder known as sleep-apnea,
including its DreamStation 1 product, due to concerns about their safety.

We also discussed with Philips the litigation that had resulted fromthe recall. The company had commissioned independent testing of
the product to answer claims arising from class action lawsuits frompeople who claimed to have been injured by the devices. As wellas testing, Philips is now distributing repair kits or replacements toaffected buyers.

The recall followed a rise in complaints about the device in the US andsome humid parts of Asia, starting in 2020. The reports blamed sinus
inflammation, coughs and other ailments on use of the devices. In
the US, the complaints coincided with states where ozone cleaningproducts are often used. The machine operates using a type of foam,
which may break down in hot and humid environments and/or throughthe use of certain cleaning products, causing users to breathe inpossibly dangerous particles. The issue was identified by Philips’ own
post-market approval surveillance and that led to the voluntary recall.
Engagement: We met the investor relations team to find out more
about the problems with the devices. The complaint rate had been just
0.03% of two to three million users. Nonetheless, the company believed
it had learned lessons from previous product recalls and responded
much more quickly this time.
In later discussions, the company said the move resulted from a change
in US Food and Drug Administration (FDA) regulations requiring
the foam used to be changed to silicone. There was little clinicalevidence of meaningful harm to patients. We also met the financedirector of one of the largest US distributors of Philips’ sleep apnea
products. He confirmed that they were happy with the way that Philips

Outcome: We concluded that there was almost no clinical evidenceof meaningful harm to patients and that the scope for litigation was
limited in both scale and type. We felt that Philips’ response wasappropriate in the circumstances, a fact that seemed to be confirmedby doctors and distributors, who were also very positive about thecompany’s reaction. It is worth noting that Philips’ ESG team offered tomeet MSCI to discuss its rating, but this offer was turned down.
The market capitalisation lost as a result of this recall far exceeds even themost bearish estimate of its financial impact. Nonetheless, management
credibility needs to be restored, both with the investment community
and the regulators – notably the FDA – before the shares can recover.
Until we have greater confidence in this pillar of our Future Quality
assessment, we will not be adding to our existing position.
We have kept in regular contact with Philips’ investor relations teamas events have unfolded, but we now need to engage with senior
management to ascertain their appetite – and ability – to make goodtheir damaged reputation.

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Principle 9:Case study: addressing board diversity and routes to net-zero carbon at an oil and gas company (Japanese Equity)
This is a Japanese oil and gas company involved in the extraction,refining and wholesale of oil and natural gas in which our JapaneseEquity portfolios hold shares.
Issue: The company’s outside directors are all either from energyrelated companies (such as trading companies, oil wholesalers andJapan Petroleum Exploration) or are former public officials.
In terms of climate change, the company has established asustainability policy and structure, identified climate-related risks andopportunities, conducted climate-related financial impact assessments
using internal carbon pricing, and undertaken climate scenario analysis.
In this respect, the company’s initiatives are considered to be advanced
compared to other Japanese companies.
In 2021 the company announced its environmental policy for 2050
entitled “Towards a Net Zero Carbon Society in 2050”. In it, thecompany set three targets for tackling climate change: 1. net zero
absolute emissions by 2050 (Scope1+ and 2 emissions, defined as
those directly generated or directly bought by the company); 2.
30% or more reduction in emissions intensity by 2030 compared to2019 (Scope1+ and 2); and 3. reduction of Scope 3 emissions (which
are defined as including, for instance, those created by suppliers,
the distribution and use of products it makes and employee
travel). In order to achieve these targets, the company said that its
immediate focus would be on acquiring carbon credits throughsupporting forest conservation and giving priority to initiatives
related to CCUS (carbon dioxide capture, utilization, and storage)
and renewable energy.
Engagement: We recently held discussions with the director andgeneral manager of the Corporate Planning Division about the firm’sboard policy and to better understand its environmental goals for 2050.
We urged the firm to bring more diversity to board discussions byappointing outside directors from fields beyond oil and gas and the
public sector.

The firm told us it had recently commissioned the first independent
assessment of its board and that the issue of board diversity had beenraised. It indicated that it would look into how it could improve the
make-up of the board.
Separately, the company has given a clear outline of its capital
allocation for the next three years and has announced plans toinvest in net-zero fields, such as renewable energy, CCUS andmethanation technology. The company’s long-term vision of where
it wants to be in 2030 has also been presented more clearly thanever before.
Outcome: We are pleased to see that the company has formulated
a long-term vision based on the premise of a transition to a carbonneutral society, which is one area we have focused on in our
engagement activities. Although the company has not set specifictargets to reduce Scope 3 emissions, it is working with stakeholders tomake cuts. We highly appreciate these moves and continue to have apositive investment evaluation of the company.
In December 2021 and February 2022, we met the executive in chargeof the Corporate Planning Division to exchange views, mainly on
future business development in the light of the transition to a netzero society. The company indicated that it will promote this throughlow carbonisation of its mainstay LNG business and reiterated its
commitment to focus on net-zero fields, such as renewable energy,
CCUS and methanation. In addition, the Medium-Term Management
Plan and Long-Term Strategy for 2030 clearly indicated that thecompany will allocate approximately 20% of its investment over the
next nine years to the net-zero field.
Since addressing climate change is a long-term issue, we believe it isnecessary to continuously monitor the company’s efforts and engage
in dialogue. However, we believe that the direction of the company’s
current efforts is the right one and that there is no need for escalation
at this time.

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Principle 9:Case study: business strategy concerns at a metals, materials and parts manufacturer (Japanese Equity)
This is a company involved in metal smelting, electronic materials andautomobile parts manufacturing held in our Japanese Equity portfolios.

and concentration and that it should aim at making each business selfsustaining and self-driven.

Issue: As a mining and auto parts group, the company has a particularresponsibility to address climate change issues arising out of its
activities. We have also had concerns about its strategy, which seems tohave resulted in inefficient investment and low margins.

In response, outside directors have told us they are seeking morethorough discussion at board level about the company’s future
direction and to gain more information from the executive directors.

Engagement: We have been engaging in stewardship-related
meetings with the company’s corporate social responsibility officer,
investor relations officer, and executive directors since 2019. So far,
we have exchanged opinions on climate change themes and on
medium- and long-term management policies. Concurrently, we
have had interviews with outside directors in order to voice ourconcerns about the company’s business strategy. In particular, we haverequested that the board improves its approach to business selection

Outcome: We are holding on to our investment for now. Progress isbeing made, including an ongoing transition away from unprofitablelarge copper mines and measures to address climate change inthe mainstay metals business. We will monitor the situation using
comparisons with other companies and review the company’s midterm plan scheduled for 2022 and its “2030 Vision”. Specifically, we will
be looking for quantitative and ESG evaluations, an improved strategy,
better capital allocation and financial discipline and plans for the future
direction of the automotive equipment division.

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Principle 9:Case Study: improving ESG rating not recognised by the market (Global Equity)
Carlisle Companies is a US building products group held in our Global
Equity portfolios.
Issue: Carlisle is divesting non-core segments of its business andallocating capital to higher-return products that aim to help meetcustomers’ environmental and energy requirements. As part of thisstrategy, it has sold its Carlisle Brake & Friction brakes division andbought Henry, a rival building products company.
We believe this new direction for the company should benefit all
stakeholders and lead to strong share price appreciation in time. It also
makes sense from an ESG perspective, as buildings make up about
28% of greenhouse gas emissions globally and Carlisle’s products help
reduce heat and energy loss. Management has started to improve
its ESG and sustainability communications, notably in its recentlypublished sustainability report.
Nonetheless, Carlisle’s planned transformation remains misunderstoodby market participants such as MSCI and company analysts. Although
the company’s ESG credentials are rated highly by ratings agencies, we

believe that it is not yet perceived as a best-in-class provider. Its closest
rival is Kingspan, which trades at almost a 50% premium to Carlisle, andis recognised by many as a sustainability leader.
Engagement: We engaged with management towards the end of2021 and highlighted a number of ESG improvements management
could make. Given its strengths in staff relations and climate-related
products, we believed these steps were meaningful wins for thecompany. Specifically, our recommendations were:●●●sign up to the UN Global Compact;
disclose the gender pay gap as it already does for the gender makeup of the board;sign up to the Science Based Targets initiative (a collaboration between
CDP, the United Nations Global Compact, World Resources Institute and theWorld Wide Fund for Nature), once it can measure its Scope 3 emissions.

Outcome: We remain long-term investors and will follow up on
Carlisle’s ESG developments throughout 2022 and beyond.

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

Activity
We believe that in some instances where one-on-one company engagements deliver insufficient
progress, collaborative initiatives with like-minded investors can increase shareholders’ influence
on companies’ corporate behaviour and ESG performance. Whilst we are seeing increasing investor
collaboration efforts across many regions, this engagement method is still in relatively uncharted
territory in some parts of the world. For example, in parts of Asia, one-on-one engagements can beviewed as more constructive and culturally appropriate to build trust. In Japan (which accounts for the
majority of our equity AUM) we are mindful about how we are involved in collaborative engagements
due to local regulations on joint shareholdings and large shareholdings, whereby severe sanctions
may be implemented for erroneous execution of reporting requirements.9 We therefore participate
in such engagements while after taking into careful consideration any potential ramifications.
Our involvement in collaborative engagements, often working with other stakeholders such asindustry partners and academics, allows us to deepen our understanding of particular ESG topics,
issuers’ ESG performance and industry best practice. To date, most of our engagements have been
restricted to a single asset class as there has been limited cross-over of equity and fixed income
holdings and our engagements are typically conducted by asset-specific portfolio managers andanalysts. However, in some regions we are exploring ways in which we could engage in a waythat covers both equity and fixed income holdings if the need arose, for instance, where we hadholdings of different asset classes in the same company.

We participate actively inforums and events, publish
thought leadership articles
and engage a wide rangeof stakeholders, including
clients, members of theinvestment management
industry, policy makers
and civil society.

Our regional investment offices select the most suitable and effective methods for their collaborative
engagement. Generally speaking, however, we use the following criteria to determine whether tojoin common cause with other shareholders:●●

whether the initiative is consistent with the particular issues we want raised and our responsible
investment policy;
whether the initiative is likely to be successful, taking account of, for instance, past results and otherparticipants in the initiative;●

whether the cost, time and effort involved is commensurate with the anticipated effect; and●whether the organisation sponsoring the initiative is one with which we want to be associated.

As part of the evaluation of our ESG processes in 2021, collaborative engagements are an area in which
we would like to more actively participate given (i) its growing acceptance, especially in Asia, and (ii)our expanding ESG team. Our dedicated ESG specialists are working with various investment teams toidentify the most relevant investor initiatives and target companies for that purpose.
We participate actively in forums and events, publish thought leadership articles and engage witha wide range of stakeholders, including clients, members of the investment management industry,
policy makers and civil society.
As alluded to under Principle 4, each of our subsidiaries is a member of the applicable local regulatory andindustry bodies. Some of the members of our subsidiaries take an active role in these bodies. For instance,●●

9

during 2021, Non-Executive Director and Chairman of our Group Board, Yoichiro Iwama, served as amember of The Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s
Corporate Governance Code. Mr Iwama also acted as Chairman of the Japan Investment Advisers
Association for seven years from June 2010, the self-regulatory body for the industry in Japan.
The Chairman and CEO of our UK entity, John Howland-Jackson, was a regular participant in theInvestment Association’s CEO Forum.

Further information on reporting obligations under Japan’s large and joint shareholding rules can be found at www.uk.practicallaw.thomsonreuters.com.

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Principle 10:●●

Eleanor Seet, the CEO of our Singapore subsidiary,is Deputy Chair of the Executive Committee of theInvestment Management Association of Singapore(IMAS), a representative body of investment managers
spearheading the development of the industry in
Singapore.
Also in Singapore, our Joint Global Head of Operations
is a member of the Environmental Risk Management
Working Group, which was formed to co-develop the
Monetary Authority of Singapore’s MAS Guidelines on
Environmental Risk Management for Asset Managers. In
2021, the working group was consulted on an e-learning
module on “Sustainable Investing & MAS Guidelines on
Environmental Risk Management” to provide further
guidance to the industry.

During 2021, we joined a number of external initiatives,
for example we became a signatory to the Global Investor
Statement to Governments on the Climate Crisis. We alsojoined the Net Zero Asset Managers Initiative, and a groupof 168 investors from 28 countries urging companies witha high environmental impact to disclose data through CDP,
the global environmental disclosure platform. The 1,320
companies approached represented over $28 trillion in global
market capitalisation and are estimated to collectively emit
more than 4,700 megatonnes of carbon dioxide equivalentannually – more than the entire European Union. This initiative
was part of Carbon Disclosure Project’s 2021 Non-Disclosure
Campaign, which aims to increase disclosure among
companies that have either never disclosed, or stopped
disclosing, environmental impact data through CDP.

Below is a list of these and other initiatives we participate in and their respective activity and goal.
Initiative

Activity and Goal

Asia Investor Group on Climate
Change

The goal of the Asia Investor Group on Climate Change (AIGCC) is to engage and cooperate with Asia-based
asset owners, investors and the global investment community about climate finance and investment.
The group is a private forum of regional investors which uses peer-to-peer collaboration to increase
understanding about the impact of the risks and opportunities of climate change presents in their portfolios.
Projects the group undertake aim to assist in facilitating dialogue and engagement with other Asian investors,
companies and regulators in the transition to a low carbon global economy.

CDP (Carbon, forests, water)

CDP runs the global environmental disclosure system. Each year CDP supports thousands of companies,
cities, states and regions to measure and manage their risks and opportunities on climate change, water
security and deforestation. Over the last two decades it has created a system that has resulted in unparalleledengagement on environmental issues worldwide.

Climate Action 100+

Climate Action 100+ has established a common high-level agenda for company engagement to achieve clear
commitments to cut emissions, improve governance and strengthen climate-related financial disclosures.
Investors participating in Climate Action 100+ recognise that decarbonisation of the global economy iscomplex and will require unique strategies and approaches across different businesses, regions and sectors.
However, signatories have agreed there should be a broad common engagement agenda across sectors,
regions and business types.
An important component of company commitments on climate change is the formation of comprehensive
business strategies that fully align with the goals of the Paris Agreement and reaching net-zero emissions by
2050 or sooner. Supporting this high-level agenda, investors identify and communicate with companies onmore detailed company-specific expectations.
As part of CA100+, we started active collaborative engagements with United Airlines during 2021, aiming tohelp the company transition in line with the Paris Agreement. We will continue with this in 2022.

Task Force on Climate-related
Financial Disclosures (TCFD)

The Financial Stability Board established the TCFD to develop recommendations for more effective climaterelated disclosures that could promote more informed investment, credit, and insurance underwriting
decisions and, in turn, enable stakeholders to understand better the concentrations of carbon-related assets
in the financial sector and the financial system’s exposures to climate-related risks.
The TCFD is committed to market transparency and stability. The task force believes that better information
will allow companies to incorporate climate-related risks and opportunities into their risk management
and strategic planning processes. As this occurs, companies’ and investors’ understanding of the financial
implications associated with climate change will grow, empowering the markets to channel investment tosustainable and resilient solutions, opportunities, and business models.

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Principle 10:

Initiative

Activity and Goal

Global Investor Statement to
The updated 2021 Global Investor Statement to Governments on the Climate Crisis delivers the strongestGovernments on the Climate Crisis ever investor call for governments to raise their climate ambition and implement robust policies. The jointstatement to all world governments urges a global race-to-the-top on climate policy and warns that laggards
will miss out on trillions of dollars in investment if they aim too low and move too slow.
The statement also sets out five actions governments need to urgently undertake:
1. Strengthen Nationally Determined Contributions for 2030 in line with limiting warming to 1.5°C.
2. Commit to a mid-century net-zero emissions target with clear sectoral decarbonisation roadmaps.
3. Ensure ambitious pre-2030 policy action, including strengthened carbon pricing, phasing out fossil fuelsubsidies and thermal coal-based power, avoiding new carbon-intensive infrastructure (no new coal power
plants) and developing just transition plans.
4. Ensure COVID-19 economic recovery plans support the transition to net-zero emissions.
5. Commit to implementing mandatory climate risk disclosure requirements.
Net Zero Asset Managers

The Net Zero Asset Managers initiative is an international group of asset managers committed to supporting
the goal of net-zero greenhouse gas emissions by 2050 or sooner, in line with global efforts to limit warming
to 1.5 degrees Celsius; and to supporting investing aligned with net-zero emissions by 2050 or sooner.
The Net Zero Asset Managers initiative launched in December 2020 and aims to galvanise the asset
management industry to commit to a goal of net-zero emissions.

International Corporate
Governance Network

Led by investors responsible for assets under management in excess of $59 trillion, and bringing together
companies and stakeholders around the world, ICGN advances the highest standards of corporate
governance and investor stewardship worldwide in pursuit of long-term value creation, contributing tosustainable economies, social prosperity and a healthy environment. This is communicated by the ICGN
Global Governance Principles and Global Stewardship Principles.

United Nations-supported
Principles for Responsible
Investment

The PRI is the world’s leading proponent of responsible investment. It works to understand the investment
implications of environmental, social and governance factors and to support its international network ofinvestor signatories in incorporating these factors into their investment and ownership decisions.
The PRI acts in the long-term interests of its signatories, of the financial markets and economies in which they
operate and ultimately of the environment and society as a whole.
The PRI is truly independent. It encourages investors to use responsible investment to enhance returns andbetter manage risks, but does not operate for its own profit; it engages with global policymakers but is not
associated with any government; it is supported by, but not part of, the United Nations.

The Investor Agenda

The Investment Agenda, formed by underlying collaborative working groups, is a common leadership
agenda on the climate crisis that is unifying, comprehensive, and focused on accelerating investor action fora net-zero emissions economy. With global reach and regional depth, this collaboration brings together andco-ordinates a number of investor and finance sector initiatives on the climate crisis.
The Investor Agenda draws on expertise from across the investor landscape to set out clearly joint
expectations in four interlocking areas – corporate engagement, investment, policy advocacy and investor
disclosure.

Women’s Empowerment Principles The Women’s Empowerment Principles (WEPs) are a set of principles offering guidance to business on how
to promote gender equality and women’s empowerment in the workplace, marketplace and community.
Established by the UN Global Compact and UN Women, the WEPs are informed by international labour andhuman rights standards and grounded in the recognition that businesses have a stake in, and a responsibility
for, gender equality and women’s empowerment.
WEPs are a primary vehicle for corporate delivery of the gender equality initiatives of the 2030 agenda and theUnited Nations Sustainable Development Goals. By joining the WEPs community, the CEO signals commitment
to this agenda at the highest levels of the company and to work collaboratively in multi-stakeholder networks
to foster business practices that empower women. These include equal pay for work of equal value, genderresponsive supply chain practices and zero tolerance of sexual harassment in the workplace.

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Principle 10:

OutcomeThroughout the year, a number of the industry
collaborations of which we are a member
announced significant advances or initiatives
towards reaching their goals:

Climate Action 100+
In March, this major climate-related investor
grouping released its first-ever benchmark
evaluating the corporate ambition andaction of the world’s largest greenhouse gas
emitters and other companies with significant
opportunities to lead the world’s shift to
net-zero emissions. The Climate Action 100+
Net-Zero Company Benchmark offers thefirst detailed, comparative assessments ofindividual company performance against theinitiative’s three high-level goals: reducing
greenhouse gas emissions, improving
governance and strengthening climaterelated financial disclosures.

As outlined in Principle 7, under Climate Action
100+ and as per the recommendation of TCFD,
we are committed to engage with investors
bilaterally and in collaborative efforts withtarget companies to integrate climate change
in their forward business planning. In 2022,
as our dedicated ESG resources are further
expanding, we are looking to more actively
participate in the collaborate engagements ofthis important initiative.

International Corporate GovernanceNetwork (ICGN)
We were shortlisted for one of the ICGN Global
Stewardship Disclosure Awards in the large
asset manager category (>£60 billion AUM).
The awards were established to recognise
investors who provide genuine insight into
their stewardship policies and how they are
implemented, and whose approach to disclosure
provides a model that others might follow.

The Climate Action 100+
Net-Zero Company
Benchmark offers the firstdetailed, comparative
assessments of individualcompany performanceagainst the initiative’s
three high-level goals:
reducing greenhousegas emissions,improving governanceand strengthening
climate-related financial
disclosures.

PRI investor working group on sustainable palm oil
Issue: We recognise that commercial deforestation is a severe threat
to the climate, a fact that was emphasised in the Intergovernmental
Panel on Climate Change’s 2019 special report highlighting theprotection and restoration of forests as a critical mitigation measure. The
production of palm oil, a very widespread food ingredient, is a key factor
in deforestation, particularly in Asia. But palm oil companies face big
challenges in promoting sustainability, not just in the plantations theyown but in the wider palm oil supply chain. Encouraging engagement
and compliance is a particular concern for palm oil refiners and traders,as much of the raw material originates from numerous independent
suppliers, which makes it very difficult to trace its origins and thesustainability practices associated with its production.
We have engaged the palm oil industry through two channels. The first is
individual engagement with companies and the integration of the results
into our investment process and ESG risk assessment framework. The
second is through our historic participation in and support for the PRI’s
investor working group on sustainable palm oil. We became a member ofthe working group in 2018, taking part in a collective effort by investors
to engage in palm oil matters and accelerate sustainability. Due torestructuring of the working group in 2021, we were not able to play anactive role in the working group, however we continue to take our own
initiatives and engage with palm oil companies on a bilateral basis.
Outcome: Since participating in the working group, we have seen
positive changes in the industry. Palm oil companies are making greater
efforts to promote the benefits of sustainable palm oil and large palm oilmerchandisers are exerting greater influence to drive sustainability.

For example, one large palm trading company we engaged in 2021
estimated that about 10-15% of its suppliers still do not meet sustainability
criteria, such as the Certified Sustainable Palm Oil standard mandated
by the Roundtable on Sustainable Palm Oil, an industry grouping. As
a result, it has stopped its business with non-compliant suppliers. The
company also estimated that as much as a quarter of palm oil producedin Indonesia and Malaysia may not be fully compliant with so-called“No Deforestation, No Peat, No Exploitation” (NDPE) commitments. It has
therefore implemented a formal sanction policy against non-compliant
suppliers. The company hopes to bring the NDPE industry to 100%, andwe see this as a welcome sign that large palm merchandisers are using
their greater influence and bargaining power to initiate ESG-relatedchange and improve sustainability standards.
We see such transparency as crucial in improving ESG compliance inthe sector. Companies that have taken a public lead in setting clear
sustainability targets have raised the bar for ESG compliance and helped
act as drivers of positive change. This has been reinforced by ESG
ratings and rankings accorded by index providers, such as MSCI and DJI
Sustainable Index, which encourage disclosures by palm oil companies.
This helps create a virtuous circle as we often take a positive view froman ESG perspective of companies that take leading roles in transparency
and disclosure. However, we will continue to take every opportunity
to talk directly to senior management on these issues. Combinedwith collaborative efforts, we continue to believe that high quality
engagements with companies are vital to good stewardship. (See ourcase studies on Wilmar International and IOI Corp under Principle 7 and
11 for examples of our direct engagement with palm oil companies.)

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

Where we engage with companies to shape corporate behaviour and influence positive change
we may escalate the discussions.
The escalation methods vary across asset classes and regions, but broadly comprise:●

additional meetings and engagement, including meetings with more senior management, whereappropriate;●

collaborative engagements, where like-minded shareholders jointly seek change from a company;●

voting at general meetings and/or supporting shareholder resolutions (in our equity holdings);●

reducing or divesting our holdings.

Our investment teams have the discretion to escalate in the most appropriate way, given thenature of the issue. Some might want to follow up, others divest.

Our engagement,
escalation and voting
decisions are fed backinto our investment
analysis, providing more
information on which
to base our investment
decisions.

Escalation timelines may also differ, depending on the region. A good example is the Climate
Action 100+ (CA100+), the collective engagement group referred to under Principle 10. CA100+
provides recommendations based on companies progress in moving towards net-zero carbon andthis is incorporated into our voting considerations in Japan.
When an incident raises concerns about ESG performance of a portfolio company, we may takea dual approach. On the one hand, we put the company through our evaluation frameworks todetermine whether we should continue to hold it in the portfolio. On the other, we may engage withcompany management to urge where appropriate.
The length of this process depends on the issue in question. While many engagements touch on topics
that are inherently long term and require time for improvement, some issues need to be reviewed
quickly. These considerations are taken into account when we select the method of escalation.
Our engagement, escalation and voting decisions are fed back into our investment analysis,
providing more information on which to base our investment decisions. Depending on theseverity of the issue and the broader context (for example, the outcome of previous engagements),
we may reduce our holdings or divest where we have the discretion and where such an outcome
would be in the best interest of our clients.
Within our Japanese Equity holdings, the initial assessment will be made by our Active OwnershipGroup (AOG) analysts, who are responsible for proxy voting and engagement. The AOG analyst
will work with the relevant portfolio manager and sector analyst to engage with the company
according to priorities based on the gravity of the issue, the company’s response and the portfolio
weight of the holding. They will open a dialogue with management with the initial aim of trying
to avoid any loss of shareholder value.
If no improvement is observable and it is determined that there is a high likelihood of long-term
damage to the company, the AOG analyst may remove the stock from the investment universe. Anysuch evaluation will be made independently of any investment decision by the portfolio manager. In
addition, when governance issues are revealed by this evaluation process, we will in principle seek toexpress our opinion through our proxy voting activity.

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Principle 11:

OutcomeAs we have suggested under earlier principles, our generalpolicy in our Asian businesses is to rely, where possible, on
one-on-one engagements. Particularly in Japan, escalation
involving a group of investors is rare, given the complications
associated with large and joint shareholdings as describedunder principle 10. Having said that, we are not afraid to berobust with companies where we think there are failings,
both in financial performance and stewardship. And we will
escalate where we think that we can improve the outcome
for our investors. The case studies that follow gives a flavour of
how we escalate issues when they occur. Other examples canbe found throughout this document.

Case study: governance and product safety issues at a building products group
Kingspan is an Irish supplier of insulation and building
cladding products held by our Global Equity portfolios.
Issue: As a cladding supplier, Kingspan has been caught up
in the controversy surrounding the cladding that contributed
to the Grenfell Tower fire in London in 2017. The subsequent
public inquiry raised governance concerns about the testingof products and the culture at the company.
Kingspan’s K-15 insulation product was identified ashaving been used in the refurbishment of the Grenfell
Tower which preceded the tower block’s devastating firein 2017, killing 72 people. The second stage of the Grenfell
Tower Inquiry identified faults with Kingspan’s internalfire safety procedures and a culture of cover-up by some
employees. Sales of K-15 were not significant and its use
in the Grenfell Tower refurbishment work was limited to
5%. However, the inquiry identified a conflict between
product safety and sales targets as a serious problem,and one which is completely at odds with Kingspan’s
mission: “to accelerate a net zero emissions future with thewellbeing of people and planet at its heart”.
Engagement: In December 2020, we had a meeting with
Kingspan’s finance director and investor relations team tohighlight our concerns about governance at the company
in the light of criticisms at the public inquiry. The meetingsgave us confidence that management was taking theissue extremely seriously and acting accordingly. This
included improving its processes and getting them
independently reviewed, as well as recruiting a new seniorhead of technical specification who reports to the internal
audit committee.
At a subsequent meeting in February 2021, we had
discussions with the chief operating officer to find out
what further action was being taken. The company told usthat improvements to product safety and traceability werebeing made, a new product technical officer reporting to
the chief executive had been appointed and the termsof reference of the audit committee widened to include
oversight of fire and safety and compliance at the productlevel.

In September, we had another update from Kingspan’s
investor relations department in the wake of a review byEversheds Sutherland, the solicitors, into its insulation
boards business. We were told that all the Eversheds
recommendations had been adopted. The company
continued to emphasise that the issue at Grenfell was asystem-related issue and not to do with the K-15 productitself. However, the conduct and culture of the company
had been called into question and management had
been quick to act.
Following our discussions, we felt we needed to escalate
the issues by making a statement that change wasneeded at Kingspan and our proxy votes would be castaccordingly. At the annual meeting in April, we therefore
chose to abstain on the re-election of the chief executive
and voted against the majority of the non-executive
directors seeking re-election. We also voted against theapproval of the remuneration report.
Outcome: The public inquiry will probably not makeits recommendations until late in 2022 or in 2023.Thereremains a class action outstanding and media attention will
not disappear but, in the meantime, Kingspan has done
everything it can and has implemented all the Eversheds
recommendations.
The actions identified during the inquiry have highlighted
the need for change at Kingspan. Senior management
recognises this need and is making changes. In our view,
these changes will make Kingspan a better business
and, on balance, we are prepared to give management
the time to make the improvements. Without trivialising
the issues, we believe on this occasion this is the best
approach to take as long-term investors.
We added to our holdings in the first quarter of 2021 but
subsequently reduced it due to the outperformance ofthe shares and our view that the valuation is stretched. We
continue to engage with management and will keep up ourpressure to ensure that there is no backsliding on governance.

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Principle 11:

Case study: governance issues at a China-based property development company (Asia Fixed
Income)Hopson Development Holdings is a China-based
property developer whose bonds we held in our Asia
Fixed Income portfolios.
Issue: Governance concerns were raised about thecompany following the announcement that it had
engaged in multiple related-party transactions whose
merits and rationale were unclear. While the overall
transaction size was not material to the credit profileof the issuer, the transaction was seen as favouring therelated party, calling into question the independence andcredibility of the management.

Outcome: These concerns led us to change our ESG
assessment and this was factored into the quantitativeand qualitative components of our Internal Credit Rating,thus reducing the overall credit rating and raising the risk
premium required to justify an investment in the company.
As a result the decision was made to divest the bonds.
Recently, in January 2022, the company’s auditor,
PricewaterhouseCoopers, abruptly resigned as it was
unable to obtain information from the company for its
audit procedures, bringing to the fore the governanceconcerns at the company and resulting in a sharp sell-off
in the company’s bonds.

Case Study: Turkish lira collapse
One area of stewardship where we are constantly alert isprotecting our clients from political risk, particularly when
we are investing in emerging or frontier markets. This may
require proactive communication with the client, not least
because providing adequate protection may require us toagree amendments to legal documentation. A case in point
during 2021 was the political and economic problems ofTurkey.
Issue: President Erdogan has for some time been
centralising control around the presidency, eroding theconstitutional separation of powers and weakening otherstate institutions. During the year there was a notable
loss of faith by international investors in the central bank,whose recent conduct has gone against conventional
macroeconomic thinking and is closely aligned with
President’s Erdogan’s stated belief that low-interest rates
can lead to lower inflation. Political pressure to cut interest
rates resulted in sharp declines in the Turkish currency andincreased uncertainty about the outlook for monetary andexchange rate policy.
As a result of these developments, the international
investment community has increasingly disregarded thecountry as a viable investment proposition and Turkey has
lost its status as a key emerging market. However, the specificcircumstances of the country mean that there is deemed tobe limited risk of contagion to the wider EM universe.
Outcome: Having begun the year underweighted toTurkey across all our bond funds or with the Turkish lirahedged out of the portfolios – depending on the nature of
the investment mandates – the decision was taken to exit
both the market and currency completely on investment
grounds. Our concerns were deemed sufficient to triggera stewardship intervention. We were concerned thatthe long-term loss of foreign exchange reserves and theimpact on the economy of a falling currency and rising
inflation would ultimately put pressures on other areasof economic policy, such as taxation. This could in turnlead to social and political tensions. We discussed theseconcerns with our clients and in some cases requesteda change in investment guidelines to effectively exclude
future investment in Turkey. We believed that, as stewardsof our clients’ capital, it was important to build inprotection from these events by removing Turkey fromour benchmark and investible universe.

Case study: getting to grips with governance at a European banking and financial institution(Global Fixed Income)Our Global Fixed Income portfolios hold bonds in thislarge European banking and financial institution.
Issue: The way the company was dealing with longstanding governance issues was raising unease amongst
investors. We got in touch with the company’s treasury
team to check on the progress of a year-long investigation
into allegations of impropriety. We were concerned thatthe matter had still not been settled and that further
investigation was deemed necessary. We were also keen
to discuss the overall ESG profile of the company. We were

not sufficiently reassured by the company’s response.
Although financial performance had been good in recent
quarters, the investigation was creating uncertainty that
was affecting the subordinated bonds in our Global Credit
UCITs portfolio.
Outcome: As a result of our discussions with thecompany, the decision was taken to replace the holdingin this portfolio with the bonds of a rival institution withsimilar economic characteristics and a more favourable
ESG profile.

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Principle 12:
Signatories actively exercise their rights and responsibilities.

Context
In our equity portfolios, proxy voting is one of the major elements of our stewardship activity, andwe take great care to ensure that our voting serves the interests of both companies and clients.
Where we invest through passive strategies, we strive to incorporate stewardship through thevoting of proxies and the engagement process, where appropriate.
In our fixed income investments we do not have the voting rights that are available toshareholders, however we aim to be active owners of assets by utilising other stewardship tools
such as issuer engagement. We hold a small allocation (approximately 0.2% of our group AUM) in
infrastructure investments via sub-advised managers who are subject to an annual ESG evaluation(a process that was initiated in 2020). We do not currently manage private equity assets.

Our voting principles
are applied with fullconsideration of acompany’s circumstancesand each corporate
governance principle
to which we hold ourinvestees is considered.

The NAM Group Proxy Voting Policy establishes our company-wide approach to proxy voting
decisions. This policy establishes the principles we use for determining the exercise of voting rights
at the group level. Implementation of the groupwide policy is actioned locally according to theattributes of the local market and freedom to interpret the rules to suit local conditions. This gives
our regional investment teams the ability to tailor their approach to stewardship according to theattributes of the local market.
As a result, there are some variations in how stewardship activities, including voting, are implemented
across the group. For example, our UK entity has a supplemental proxy voting policy addressing
environmental and social principles as it relates to our Global Equity strategy.
The full text of our group Guidelines on Exercising Voting Rights policy (as well as our
supplemental Standards for Exercising Voting Rights on Japanese Stocks) are available here, with asummary of the main detail listed below.
The groupwide policy underscores our focus on ESG in proxy voting decisions and also covers thefollowing non-exhaustive list of considerations:●shareholder return;●the separation of executive and supervisory functions;●the size and composition of the company’s board of directors;●

the auditors;●

executive compensation systems;●●

Company control and takeover defences: We are generally opposed to resolutions aimed atpreventing change of control. On the other hand, takeover defences may be assessed positively if
the acquisition risks are clear and existing shareholder value would not be damaged.
new share issuance.

We regularly vote and when doing so take account of groupwide policies, advice from proxy voting
advisers as well as other considerations like past engagements and local policy.
Our voting principles are applied with full consideration of a company’s circumstances and eachcorporate governance principle to which we hold our investees is considered. Upon receipt of any
advisory research and voting recommendations, the team responsible for the security in question
is able to analyse the report and conduct further research where any issues have been flagged.

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Principle 12:

We aim to cast our votes on the same resolution consistently
across all vehicles that we manage unless specifically directed
not to do so by clients in respect of their own accounts. We
consider requests from clients to override a house policy on acase-by-case basis. In a small number of instances, segregatedaccount clients have their own policies, which we supplementwith ours where appropriate. We also have segregatedaccount clients who make their own voting decisions. It is notpossible for clients in pooled funds to direct our voting.
For Japanese Equities (which account for almost threequarters of our firmwide equity AUM), our supplemental
Standards for Exercising Voting Rights on Japanese Stocks
establish detailed decision criteria. The Active OwnershipGroup (AOG) is responsible for confirming all proposals forholdings in both actively-managed and passive portfolios,
and making a comprehensive decision on whether toapprove or disapprove after taking into account the content
of past engagements with investee companies. Advice
from ISS based on our proxy voting guidelines is one of the
inputs in the decision-making process, but this advice isused for reference only. The Investment Support & Planning(ISP) team is responsible for exercising voting rights for nonJapanese stocks, where the investments are held via Japan-

domiciled feeder funds on behalf of Japanese investors.
In some cases, when there are important resolutions the
ISP team takes account of the opinions of the overseas
investment management subsidiaries who are closest to
the market where the investee company is based. We also
note, in some cases, the overseas team may also conductengagement with local companies for stocks held in Tokyo,
in coordination with ISP. Execution is outsourced to ISS.
For equity strategies not managed in Japan, ISS may
provide analysis of individual proposals and customised
proxy voting recommendations based on our proxy voting
guidelines, however the local Nikko AM entity makes theultimate decision on how to exercise these voting rights,
which are then executed by ISS.
One example in 2021 where we disagreed with thevoting recommendation from ISS occurred as a result of avote on an independent board chair. This did not require
engagement with ISS as we understood the rationale for
their advice, but we disagreed with it and voted against
their recommendation. See our Case Study “voting
against recommendation from our proxy voting advisers”
for more detail.

Case Study: voting against a recommendation from our proxy voting advisers
Abbott Laboratories discovers, develops, manufactures, and sells healthcare products and services.
Issue: ISS recommended we vote against the proposal to elect an independent board chair, in view of the benefitsof keeping the existing incumbent, Miles White. Those cited included his ability to provide guidance for the new chief
executive, Robert Ford, given his long experience of running the company. We also recognised that the shareholder
proposal for an independent chair that had been tabled did not demand immediate change. The aim was to allow
adequate time for Mr Ford to gain from Mr White’s presence until he settled into his new role.
Similar proposals have appeared on the company’s ballot eight times since 2005, receiving between 20-30% shareholder
support on these occasions. Our general policy is to use our votes to support independent board chairs as we believe
this most effectively ensures the protection of long-term shareholder interests. Given that Mr White had been chief
executive for 21 years, we did not believe he could offer genuine independent insight.
Outcome: In view of the previous shareholder proposals and Mr White’s long-standing tenure, we saw this as acontentious issue that company management needed to address to protect shareholder interests and Abbott’s
reputation. As a result, we voted for the proposal and in opposition to ISS’s recommendation to vote against.

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Principle 12:

Recalling lent stock
We sometimes lend stock in accordance with our internal
controls on lending practices. In those instances where
we do, we may recall stock from the borrowers in order tovote in line with our proxy voting policies as there are cases
where exercising voting rights is more desirable from theperspective of responsible stewardship than earning sharelending income.
For example, in our Japanese Equity operations, if our voting
guidelines signal a governance concern that would result ina vote against management or re-election of directors wewould recall the stock in order to ensure that we are able tovote and therefore satisfy our stewardship responsibilities.

Activity
We cast votes on all shares where there are no legal, clientor technical constraints. Examples of where we may not beable to vote include where power of attorney has not been
granted by a client, or in markets where share blocking isapplied. These include bearer shares in the Swiss market,
some stocks in the Norwegian and German markets andEgyptian market stocks.
Voting decisions for each of our group entities are executedby ISS. We use ISS to monitor our share and voting rights
via a web-based platform. This shows us the accounts forwhich ISS votes, sends us notification of upcoming meetings,
establishes voting decisions, tracks the status of votes andgenerates reports on voting activities. A record of all votes castis also stored by ISS, allowing us to look back on historic voting
records to ensure all service standards are being met and all
votes are being cast as directed.
A summary of our firmwide voting records is listed in the tablethat follows. (This table is also provided within our annual
Sustainability Report.)

From Jan 2021 to Dec 2021

RegionAPAC ex Japan
EMEA
Japan
Latin America
North America
TOTAL

Number of meetings
2,457
1,213
2,465
228
1,077
7,440

Number of
resolutions
19,51017,536
23,772
2,071
11,36874,257

Vote Formanagement
(%)
88%
91%
88%
88%
91%
89%

Vote Against
management
(%)
12%
9%
12%
12%
9%
11%

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HOME

Principle 12:

Detailed voting records, including reasons for voting against
specific proposals, are published on our website for thevast majority of our equity assets, notably Japanese Equities
and Global Equities. For those voting records not publicly
disclosed (US, New Zealand and Asian Equities), our policy is
to release the information to clients on request.

As a result of implementing our guidelines on voting, 11%of our votes were cast against management. The reasons forvoting fall broadly under the headings that were outlined
within the context section above. A breakdown of thereasons for voting against resolutions across our firmwide
voting activity during 2021 is shown in the chart below.

Count of votes against management in 2021 and reasons

528

Routine/Business

743

Reorg. and Mergers

1,311

Non-Salary Comp.

4,279

Directors Related

712

Capitalisation

82

Anti-takeover Related

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Fixed Income
In our fixed income allocations, we are not able to exercise
the same level of influence as holders of equities since
the instruments we hold do not confer proxy voting
rights. Nonetheless, we aim to exercise our stewardship
responsibilities through other means, such as by engaging
with market participants and ensuring that our productoffering is in line with the needs of our clients.
When participating in the primary bond issuance markets,
our investment teams review prospectus and transaction
documents (for example offering circulars) for everytransaction as part of the due diligence process. Where
possible the investment team engages with issuersand structuring advisors on the terms and conditionsof issuances we are interested in, including providing
feedback and, where applicable, seeking amendments toterms and conditions in legal bond documentation. In our
experience, issuers accessing the bond market for the firsttime in particular tend to be more receptive to feedback
on legal documentation and contracts. Specifically, forprivate companies’ bond issuances we also ask for accessto further details provided in trust deeds, for example,
financial disclosures. It should be noted however that in theJapanese bond market this approach does not play a bigrole for publicly-traded corporate bonds.

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HOME

Principle 12:

Outcome
The table that follows demonstrates examples of how our voting policies were put into practice during 2021.
Company

AmazonAmazonWoodward

Keyence

HelloFresh SE

CIMC Group

Mitsubishi
UFJ Financial
Group

Toyo
Engineering
Corporation

Tatsuta Electric
Wire Cable
Company

Proponent

Shareholder

Shareholder

Shareholder

Management

Management

Management

Shareholder

Management

Management

Date

26 May26 May27 January

11 June26 May15 December

29 June26 June18 JuneResolution

6

8

5

2.1, 2.2, 2.3, 2.4, 8
2.6, 2.7

2.8

3

1-7

1-1

Title

Gender Pay
Gap

Community-Environment
ImpactCompanyElect Director
Specific BoardRelated

Approve
Remuneration
PolicyElect Director

Revision to
Articles ofIncorporation

Elect Director

Elect Director

Summary

Report on
gender/racial
pay gap

Report on
the impactsof plastic
packaging

Adopt apolicy toinclude nonmanagement
employees asprospective
directorcandidates

Elect asdirectors
Takizaki,Takemitsu,
Nakata, Yu,
Yamaguchi,
Akiji, Miki,
Masayuki,
Yamamoto,
Akinori andTaniguchi,
SeiichiApproveremuneration
policyElect asPartialdirector
amendment to
Iwasaki Masaru the articles ofincorporation(disclosure of aplan outlining
the company’sbusinessstrategy
to align its
financing andinvestmentswith the goalsof the Paris
Agreement)

Elect asdirector
Yamamoto
Reijirou

Elect asdirectorMiyashita
Hirohito

Voting Result Not approved

Not approved

Not approved

Approved

Not approved

Approved

Not approved

Approved

Approved

NAM Vote

Againstmanagement

Againstmanagement

Againstshareholder

Againstmanagement

Againstmanagement

Againstmanagement

AgainstshareholderFormanagement

Againstmanagement

Rationale

We voted forthis resolution
as in linewith a needfor Amazon
to improvedisclosurearound arange of issues
relating tohuman rights,
labour rights,
environmental
issues anda range ofgovernancefactors.

We voted forthis resolution
as in linewith a needfor Amazon
to improvedisclosurearound arange of issues
relating tohuman rights,
labour rights,
environmental
issues anda range ofgovernancefactors.

We votedagainst thisresolution as
the company's
current board
framework anddisclosuresappear to beproviding itwith adequate
oversight ofworkforceissues.

We votedagainst theseresolutions
due tothe lack of
independent
directors
which should
be increased
beyond theregulatory
minimumof 2 and theongoing lackof gender
diversityon theboard, albeit
improved by
the additionof one female
director at themeeting.

We votedagainst thisresolution
due to thelack of specificperformance
criteria forincentives or
explicit caps
on pay-outs.
The policy
contains
scope fordiscretionary
adjustments
and payments.
We want toencourage
betterremuneration
practice.

Failed to meet
NikkoAM’s
independence
criteria

Althoughthere isroom fordebate about
inclusion inarticles ofincorporation,
focuseddecisionson whether
proposalwould help
enhancemedium- andlong-termshareholder
value. Voted
againstshareholder
proposal
based on theassessment offirm’s initiatives
and stanceregardingclimate relatedrisks.

The director
failed to meet
NikkoAM's
independence
criteria.
However,as he is a
representative
director of
a companythat invests
in preferredstock, and hepreviously
underwrote
and saved
the company
when its
survival was injeopardy, we
voted for theelection of thedirector.

Not inconflict withperformanceand return
criteria, but
considering
concerns withthe company's
use of capital
resources,
such as largeloans to major
shareholders
in conjunction
withinsufficient
dividends, we
opposed there-electionof the CEO
to the board.
Opposed thereappointmentof topmanagement
as there wasno dividend
proposal.

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