Nikko Asset Management Group
Response to the UK Stewardship Code 2020
For the reporting period 1st January to 31st December 2022

April 2023

Foreword
We realise the growing importance of sustainability withevery year that passes. We see it in our investments, we hear
it from our clients, and we witness it in world events. As theneeds of our clients and society evolve, we recognise thatthe definition of what it means to be responsible stewardsof our client’s capital also evolves. We have taken proactive
and bold steps across our organisation to address theseneeds, described within this report, and I believe that they
speak louder than any words.
2022 marked a notable milestone for Nikko AM Group.
My appointment as its first female President was important,
not just for us, but for asset management as a whole.
Women have historically not been well represented in thefinance industry, whether in Japan, Asia or globally. That
is now changing, and I am proud that Nikko AM Groupis in the vanguard, a testament to my colleagues andpredecessors on our board.
Since joining the company in 2014, I have been a vocal
advocate for change. I was an early supporter of ourdiversity and inclusion efforts, which began in 2015 with
our Women’s Working Group and have championed theimportance of having the widest range of talent possible
represented in our ranks. For many years, Nikko AM Group
has also been energetic in supporting better stewardshipand governance, both within and outside the company.
Our Non-Executive Chairman, Yoichiro Iwama, played a
key role in promoting the introduction of Japan’s versionof the Stewardship Code in 2014 as a member of the
Panel for Vitalizing Financial Capital Markets. In his current
role as member of The Council of Experts Concerning
the Follow-up of Japan’s Stewardship Code and Japan’s
Corporate Governance Code he continues to be involvedin any subsequent revisions to the Code.

On these solid foundations, we have continued to build
our stewardship credentials in 2022. Both our Executive
Chairman, Yutaka Nishida, and I have been given specific
key performance indicators covering our sustainable
investment activities. At the same time, we as a firm haveundertaken a major review of our sustainability activities,
resulting in the creation of a much-enlarged and centralised
Global Sustainable Investment department. This will extend
and deepen the reach of sustainability in our everyday
investing and Stewardship activities.
We approach stewardship from a different perspective
to many European asset managers. It is no less strong inJapan, but emphasises consensus over confrontation,
collaboration over individuality. In our efforts, we are
therefore trying to unite best practices from across theglobe. In doing so, we believe we have an educationalrole in furthering stewardship, sustainability and diversity
amongst both investors and investee companies in Japanand globally.
We believe we have gone a long way to fulfilling that rolein the actions we have undertaken during the past year.
But, given the pressing need for stewardship – and not leastaction on climate change – we understand the danger ofcomplacency: we know we can and must do more in futureyears. Our to-do list includes further growing our Global
Sustainable Investment department, advancing our ESG
integration and stewardship activities and increasing thenumber of women in senior roles. They are among my toppriorities in my role as President and I hope these will beseen in future reports of this kind.

Stefanie Drews, Group President

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Contents
Principles

Page
Principle 1

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

4

Principle 2:

Signatories’ governance, resources and incentives support stewardship.

12

Principle 3:

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

21

Principle 4:

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

24

Principle 5:

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

33

Principle 6:

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

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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.

44

Principle 8:

Signatories monitor and hold to account service providers.

53

Principle 9:

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

56

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

64

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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Appendix:

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Case study Index.

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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.

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 (“Nikko AM Group”) is today one of Asia’s largest independent
asset managers, with $203.9 billion1 assets under management (“AUM”, as at 31 December 2022). Headquartered in Japan,
which is home to a large proportion of both our clients and our AUM, we are also represented in the rest of the world,
including the UK. We combine a global perspective with our Asian roots to create sophisticated and diverse investment
solutions to meet our clients’ needs. These needs differ, depending on whether the client is retail or institutional. But for all
types, our guiding strategy is to ascertain the purpose for which their assets are being managed and then to steer them
towards the outcomes that best meet that purpose. In doing so, we put stewardship at the heart of our activities and thedistinctive values that our Japanese heritage brings.
Japanese culture values harmony, both with nature and with other people, putting less emphasis on the individual and moreon society than in Western traditions. We have therefore grown up over the past 60 years infused with the belief that wemust be good corporate citizens. Our approach to stewardship and engagement has evolved against that background and it
informs the way we have addressed our response to the UK Stewardship Code.
A breakdown of our AUM by asset class and client domicile is shown in the following charts.2
Assets Under Management by asset class2

Assets Under Management by client domicile2

Alternatives/Others 7.2%
Multi-Asset 6.1%
Asia ex-Japan 3.8%
Money Markets 14.8%

Japanese
Equity
48.7%

Japan
90.9%

Australia &New Zealand
2.5%
North America
0.2%
EMEA 2.5%

Fixed Income 9.9%

Other 0.1%

Other Equity 13.2%

The Nikko AM Group and its affiliates has a presence in 11 countries, with our in-house investment teams located in seven of
our offices in four continents. We have a diverse workforce that includes 30 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 asset management from across our global network, as well as across a range of active
equity, fixed income and multi-asset strategies, with a complementary range of passive strategies, including some of Asia’s
largest exchange-traded funds (ETFs).

1

As of 31 December 2022. Consolidated assets under management and advice of Nikko AM Group, 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 individuallyin this report. ‘Alternatives’ constitutes REITs, Equity Long/Short and Infrastructure funds. Infrastructure represents 0.5% 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.

2

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Locations of our offices and investment teams
EDINBURGH
Global Equity

TOKYO – HEAD OFFICE
Japan Equity,
Fixed Income,
Alternatives, ETFs<
Money Market

LONDON
Global Fixed Income,Money Market
LUXEMBOURG
Management
Company

NEW YORK
Thematic
Equities

SINGAPORE
Asia Ex-Japan Equity,
Asia Fixed Income,
China Equity,
Multi-Asset, ETFs

INVESTMENT CAPABILITIES:

Equities

Fixed Income

Multi-Asset

Alternatives

HONG KONG
China Equity
ETFs

AUCKLANDNew Zealand Equity,
Fixed Income
ETFs

Money Market

While most of our AUM and clients are based in Asia, our long-term business goal is to offer best-in-class investment solutions
for clients worldwide.
We implement cross border delegation arrangements whereby the locally contracted Nikko AM Group office manages
business development, supported by local client servicing teams, with portfolio management delegated to the respective
regional Nikko AM entity where the relevant investment expertise is based. For example, the AUM of our UK entity, accounting
for approximately 8% of the Group total (as at 31 December 2022), represents assets managed on behalf of a range of clients
who are accessing the investment capabilities of both our local and global investment teams. A breakdown of the AUM of our
UK entity as at 31 December 2022 is provided in the charts below:
Nikko Asset Management Europe Limited:
AUM breakdown by asset class

Nikko Asset Management Europe Limited:
AUM breakdown by client domicile
Australia/New Zealand 2.6%

Money Market
15.9%
Japanese Equity
29.7%

Middle East
20.4%

Global Fixed Income
30.3%

Global Equity
24.1%

UK 8.9%Europe22.3%

Asia (ex-Japan)
13.1%

USA 1.9%
Japan 30.9%

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

the integrity of capital markets,●

our responsibilities to environmental conservation, and●our social responsibility.

The Code of Ethics is reviewed by the Nikko AM Group
Board of Directors (more details of the review process aredescribed in Principle 5) and attested to annually by all
employees globally. It acknowledges that, as a fiduciary,
we owe our clients a duty of loyalty and care. When acting
in a fiduciary capacity, all employees must act for the
benefit of our clients, placing their interests before theinterests of the Group, a third party or their own. Employees
must also act with reasonable care and diligence andexercise prudent judgement in the performance of theirduties. The code provides guidance and sets standards in a
number of specific areas, including our duties to regulatorsand the public, to upholding the integrity of financial
markets, to ethical business practices, fair competition,and personal trading, and also our environmental andsocial responsibilities.
At the heart of our culture is the belief that, as stewardsof our clients’ money, we have a duty to provide the rightinvestment solutions to meet their goals. To do this requires
us to understand their investment objectives, risk appetite,sustainability ambitions, regulatory and accounting
frameworks, as well as the wider social and environmental
climate in which we all live.

ESG has been a historical area of focus with our launch ofJapan’s first socially-responsible investment fund in 1999 and
the Global Green Bond Fund with the World Bank in 2010 andforms a part of our wider global growth plans. In 2022, welaunched an internal project, driven by our Group President
Stefanie Drews, with the aim of establishing an enhanced
ESG structure, fully connected across our global offices, thatwould enable us to deliver leading ESG outcomes for ourclients and meet high international standards.
This project culminated in the launch of a Global
Sustainable Investment department in August 2022 and theappointment of a Global Head of Sustainable Investment,a newly created role as well as significantly expanded
ESG resources across the UK, Japan and Singapore.
Further details on the resourcing and governance of thisdepartment can be found under Principle 2.
The department is split into five functions:●●●

Environmental, social and governance strategy
We strongly believe that environmental, social andgovernance (ESG) considerations are inherent to long-term
corporate value creation and contribute to the realisation ofsustainable economic growth. In the light of this, we view
ESG issues as an integral part of our fiduciary duty to clientsand endeavour to incorporate ESG principles in all ourinvestment processes.

●●

Regional ESG specialists: these are our ESG“all-rounders” who work closely with the investment teams
supporting their ESG integration and stewardship efforts.
They also work closely with our other functions, such as
client services and product development, to ensure that
we deliver the best outcomes for our clients across theentire value chain.
Research and integration: this function, which isstill being developed, is responsible for supporting ourinvestment teams and ESG Specialists with subject matter
expertise and ensuring we continuously improve our
integration efforts. The function will include, for example,
an environmental specialist to help us enhance ouractivities in this area.
Stewardship: this function will support and co-ordinate
our firm-wide stewardship efforts. Looking forward, it will
aim to continuously improve our stewardship activities,
including engagement, proxy voting and ESG researchand respective disclosures.
Data and reporting: this function is dedicated tosourcing, storing, validating and disseminating ESG data
globally, as well as providing support with ESG data
analytics and reporting.
ESG regulations: this function is responsible for
identifying, assessing, determining and supporting ourapproach to ESG regulations and standards globally,
with a focus on regulations in EMEA.

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The creation of this department, and other organisational
developments highlighted in this report, reflect theimplementation of our updated ESG strategy and ourcommitment to meeting high international standards on
ESG. Our approach to ESG integration is outlined in moredetail under Principle 7. Our policies on ESG, responsible
investing and stewardship are available on our website
under the following headings: Fiduciary and ESG Principles,
Commitment to Responsible Investment, Position Statement
on Climate Change, Task Force on Climate-Related Financial
Disclosures, Sustainability Report, Engagement and
Stewardship Strategy, and Stewardship Activities Report and
Self-assessment.
As part of our commitment to meeting international
standards, we are continually improving many of ourexisting frameworks, policies and disclosures. For example,
and as outlined below, in 2022 we developed and disclosed
our 2030 net zero target under the Net Zero Asset Managers
Initiative. Further initiatives that we are involved with areexpanded upon throughout this report, with a list of key
initiatives provided under Principle 4.

CultureOur diverse, inclusive and collaborative culture is a
key competitive advantage and supports our ability togenerate differentiated insights. Our staff members comefrom a rich diversity of backgrounds, with language
capabilities covering all the main Asian and European
languages.
Our team meetings encourage widespread participation,
drawing on the collective intellect, experience and culturaland gender diversity of our teams and each individual’s
experience to question the market consensus. Combinedwith common values based on mutual respect, our teams
are well-composed to meet the challenge of investing indiverse and fast-moving global and regional markets. These
principles of respect for diversity and the rights of our fellow
workers are set out in our Code of Ethics.
Our investment teams have autonomy to implement theirown investment philosophies and processes in the markets
and asset classes in which they specialise. To support thesethem, we are making investments in both our investment
and stewardship teams and, as mentioned above,
developing and building the resources we devote to ESG.
This is discussed in more detail under Principle 2.

Our diverse, inclusive andcollaborative culture is a key
competitive advantage andsupports our ability to generate
differentiated insights
Engagement
Engagement is a key factor in the stewardship of ourclients’ assets. We find that constructive dialogue with ourinvestee companies helps foster their long-term value andsustainable growth characteristics, improving both returns
for clients and managements’ accountability to society andthe environment. This requires in-depth knowledge of thecompanies and the environment in which they operate,
as well as wider considerations of sustainability consistent
with our investment management strategies. Our longexperience in these areas means that the approach toengagement we adopt sometimes needs to be adapted to
cultural differences in different parts of the world. We discuss
engagement further under Principles 9, 10, 11 and 12.

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Activity
Policies and position statements
In line with our commitment to continuous improvement,
during 2022 we took steps to ensure that our investment
approaches, strategy and culture continue to foster effective
stewardship. Detailed updates to policies and position
statements can be found under Principles 2 and 5.
A key update relates to our membership of the Net
Zero Asset Managers Initiative. Following our successful
application in 2021 to join the Initiative, we drafted andsubmitted our initial disclosures covering:●●●

our initial commitment on the proportion of assets to be
managed in line with net zero (43%)3;
our interim 2030 targets for emission reduction (50%reduction in carbon footprint for assets covered by theInitiative); andthe methodology underlying our commitment.

We will continue to progress towards our net zerocommitments and link them to wider projects, such as
our reporting under the Task Force on Climate-Related
Disclosures (TCFD), as appropriate.
As part of the project to implement the EU’s Sustainable
Finance Disclosure Regulation, new frameworks andprocesses were established and documented to ensure thealignment of our portfolios with regulatory requirements
and to make relevant disclosures. Additionally, relevant
policies were reviewed to ensure that key ESG requirements,
such as the integration of sustainability risk, were covered.
We continued to invest in people, technology and ESG
data-extraction and integration capabilities to ensure that
we are able to provide strong solutions to our clients. This is
described in more detail under Principle 2.

Staff diversity and inclusion
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, LGBTQ,Disabilities, and Racial Equality—where employees plan
initiatives and events to promote diversity. For instance, ourworking group for people with disabilities helps to provide
a better working environment for such employees. It also
works to enhance employees’ understanding of each other’s
needs and encourages cross-departmental co-operation.
We have a Diversity and Inclusion Policy, underlining thefirm’s commitment to embracing diversity and creatinga work environment free from discrimination andharassment. In it we state that Nikko AM Group embraces
and encourages individual differences amongst staff and3

has a zero-tolerance policy towards discrimination of any
kind. These principles apply, amongst other things, toour practices and policies on recruitment and selection,compensation and benefits, professional development
and training, promotions, transfers, social and recreational
programmes, redundancies and terminations.
It aims to ensure that:
●

●

●

●

all staff treat each other 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 fromthe highest levels of the organisation, with particular focus
from Stefanie Drews, Nikko AM Group Director and President.
Ms. Drews has been a champion of diversity and sustainability
issues within the company since joining the company in 2014
as Head of Institutional Marketing and Proposition and has
been an internal campaigner on matters of equality as she has
moved through the ranks of the organisation.

Nikko AM Group embraces
and encourages individual
differences amongst staff and hasa zero-tolerance policy towards
discrimination of any kindIn terms of staff diversity, we recognise that we can dobetter. Currently, women make up 38% of our total staff andoccupy 20% of our management positions. We are actively
trying to raise the numbers and are a signatory to the “30 by2030” initiative, committing the firm to ensuring that at least
30% of all our managerial positions are occupied by womenin 2030. We are also a member of the 30% Club Japan
Investor Group, which aims to have 30% of all board seatsof TOPIX 100 companies occupied by women by 2030. Ourcurrent female Group Board representation is 30%. 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.

43% of total groupwide AUM by 50% by 2030, compared to levels as of 31 December 2019.

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Linked to this, in 2022 we rolled out regional action plansto achieve our goal of raising the percentage of female
managers to 30% by 2030. Within Japan, we have thefollowing list of initiatives underway:
●

●

●

●

Recruitment: we have adopted a number of aims andpolicies to increase the number of women at Nikko
AM Group through, for instance, ensuring that all job
candidates are interviewed by at least one femaleinterviewer.
Working environment: we have introduced more
flexible working arrangements and further improved bothmaternity and paternity leave.
Talent development: we are providing more
mentoring and leadership guidance to help advance
employees’ careers.
Raising awareness and culture building: we arepromoting gender balance by taking measures to increaseawareness at all levels of the business.

These activities are not confined to our Japanese offices.
Each of our regions has developed its own set of initiatives tosupport this global aim.
We are also actively seeking to create more welcoming
working conditions for LGBTQ employees. We are an official
member of LGBT Finance, an organisation set up by financial
institutions in Japan to support LGBTQ individuals. Thisinitiative enjoys very visible grass-roots support from ouremployees and very engaged sponsorship from our senior
management. In 2022, for the fourth year running, Nikko AM
Group was awarded a gold award in the Pride Index, createdby Work With Pride, a non-profit-making organisationthat helps companies and other organisations adopt andpromote LGBTQ-related diversity and inclusion initiatives.
Additionally, in 2022, Nikko AM Group became the firstJapanese asset manager to join the LGBT Great initiative(receiving a Bronze award). LGBT Great is an alliance ofvarious types of organisations in the financial services
industry, with a shared vision to make it a trusted place for
LGBTQ talent, clients and investors.
In 2022, we conducted our first-ever global employee
survey on racial equality. This was led by the Global
Racial Equality Group and the Corporate Sustainability
department. We received 587 responses in total and held
follow-up educational sessions for employees globally. As
a result of the survey, we are now looking into focusedtraining options for our staff.
Lastly, we conducted several employee education seminars
on supporting people with disabilities, including a series ofsign language lessons. As a firm, we continue to sponsor theJapan Wheelchair Rugby Team.

Social outreach
We realise how important it is to nurture future talent in thisindustry, so we participate in the UK-based initiative Future
Asset. This tries to make the fund management industry
relevant and interesting for young people, especially women.
Several of our Global Equities team are mentors andjudges in Future Asset’s annual Growing Future Assets
Competition, where teams of girls make an investment
pitch to win prizes for themselves and their school. There
were more than 80 teams entered in 2022 and each had toprepare an investment report on a company by answering
questions about the industry, the company and how tovalue it. The teams then summarised their case in a shortvideo, where they were able to use their creative skills invideo production to pitch their investment idea. From these
entrants, the field was narrowed down to a final pitch to alive panel of judges.
We hope our participation in Future Asset will help Scottish
girls to leave school understanding that investment isrelevant to everyone, can have a positive impact, and offers
fulfilling career opportunities. We were encouraged that, in
2022, following her participation in the competition a few
years before, one of the girls from the initiative worked as anintern at Nikko AM Group.
We are also one of the first firms to sign up as a member
firm of the UK-based initiative Progress Together. Thisis the first body of its kind to promote socio-economic
diversity and progression in the UK financial services sector,
particularly at a senior level. As a member firm, Nikko AM
Group has committed itself to start collecting employee
data and sharing that data (anonymised) with Progress
Together to ensure they can strengthen their benchmarking
capability. We are also supporting the organisation throughsenior level sponsorship, sharing our experiences, and using

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our influence to push for change across the sector. We lookforward to what can be achieved from our partnership in
2023 and beyond.

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

EquityThe rights of an equity shareholder, particularly in terms ofvoting and accessibility to companies, allow us to implement
our investment beliefs and carry out our stewardship
responsibilities in many ways other than making an
investment decision. These are discussed further throughout
the report, with our engagement and voting activity coveredin particular under Principles 9, 10, 11 and 12.
One way stewardship has influenced our actions is thediscussions our investment teams have been having withclients and prospects regarding their own priorities andobligations. The looming spectre of climate change is aconcern for many and is one of the topics we have in thefront of our minds, not only during internal deliberations
in respect of our own net zero ambitions and targets, butalso in our engagements with investee companies andincreasingly in our voting deliberations. We are investing intools that enhance our ability to report on greenhouse gas
emissions and fulfil the evolving regulatory requirementsthat our clients face (for example in respect of TCFD
obligations under the Taskforce on Climate-Related
Financial Disclosures).
An example of one of our proactive initiatives on theenvironmental front during 2022 was when our Global
Equity team contacted investee companies to ensure
they understood our obligations as signatories of the
Net Zero Asset Managers initiative and other climaterelated commitments, as well as the expectations of ourclients (further detail on this is provided under Principle4). Meanwhile, following increasing interest expressed bya number of clients invested in our Global Equity strategy
about the “social” element of ESG, the team is in the processof collating diversity, equity and inclusion metrics oninvestee companies.

Fixed income
Fixed income is an area where it can be more difficult to havea direct influence on the direction of investee companies. A
bondholder lacks the voting rights that accompany equity
ownership, however bond holders may choose to notparticipate in new issues or divest holdings of a company
as a way to express displeasure at corporate behaviour. It isalso important to engage with management to encourage
positive changes where we as stewards see areas of
improvement for a company.
Our teams have been active in extending our stewardship
activities in a number of fixed income areas during the year
which are discussed further throughout the report.
Our Global Fixed Income team for example, engages withclients on ESG and broader stewardship questions andhas intensified its engagement with bond issuers. During2022 the team continued to develop their proprietary ESG
monitoring tools. It is increasingly taking ESG considerations
into account at a bond selection level, regardless of whether
these considerations are explicitly outlined in investment
mandates. The team’s rationale is that it wants to avoid
situations where the market moves in favour of issuerswith superior ESG scores, causing client portfolios to be left
holding underperforming bonds. As a result, if there is achoice of issuance that would fulfil a specific need in termsof duration positioning and risk profile, the team will opt for
the higher ESG scoring bond. Our other fixed income teams
have their own analytical tools to integrate ESG factors
effectively into their investment decisions.

Our main instrument fortranslating our investment
beliefs, strategy and culture
into effective stewardship is ourinvestment teams
Our Asia Fixed Income team, for example, made significant
improvements to its ESG monitoring system during 2021,
formalising the process by which ESG risks and opportunities
recorded during the issuer analysis process are factored into
the outcome of our proprietary Internal Credit Rating. The teamhas continued to embed this process into its operations during2022 and has added a further model to better understandthe ESG risk of sovereign bonds. In 2022 more focus has also
been placed on dedicated ESG engagements with Asian bondissuers. This is explained more fully under Principle 7.

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Outcome
We believe this year’s report reflects a number of majoradvances in our culture of stewardship. Evidence ofour progress will be found in subsequent sections, but
perhaps the most important has been the establishmentof our Global Sustainable Investment department as theculmination of a project to redefine our organisational
strategy in relation to ESG issues. Along with theappointment of a Global Head of Sustainable Investment
at a senior level, reporting directly into our Group President
and Chief Investment Officer, this for the first time brings
all our stewardship and ESG resources under one umbrella
and significantly expands the resources we commit to
stewardship. The department is already influencing how
we integrate ESG into investment decisions. Its creationis concrete proof of how we are embedding stewardshipvalues in everything we do. Further detail on thesedevelopments is provided in our response to Principle 2.
Beyond that, we believe we have been more effective thanever in intervening at companies where we have identified
ESG failings. These interventions have been both on our
account and collectively with other investors. Evidence of our
success will be found in the case studies later in the report.
We have not stood still in pushing forward the stewardshipagenda more widely either. We have extended ourcommitments to industry initiatives such as the Net Zero
Asset Managers initiative, the TCFD and Climate Action
100+. In all cases, we have been increasingly active inparticipating in industry initiatives and conferences on
major issues, often stewardship related. Further informationon these will be found in our responses to Principles 4, 7
and 10. The disclosures that we make as a result of thesecommitments are driven by, and in turn help to drive,
underlying organisational change, such as the formationof the new Global Sustainable Investment department,
revamped governance, enhanced analytical capabilities andmore focused engagement initiatives.
We face different challenges to asset managers that havea European or North American heritage. Japanese culture
values stewardship, but often approaches it from a different
perspective than Western societies. As we have grownover the last 60 years from an organisation focused on thedomestic Japanese market into a global asset manager, wehave brought with us these Asian traditions of stewardship
which are themselves evolving as they meet Western
practice. This process is challenging us to review andenhance our approach to stewardship.

We believe this year’s reportreflects a number of majoradvances in Nikko AM Group’s
culture of stewardship
One of the key forces driving change at Nikko AM Groupis feedback from clients. We take feedback from our retailand institutional clients very seriously. As we describe indetail under Principle 6 and other sections of this report,
they help guide how we manage their assets and the typeof assets we use. We know that many clients are interested
in returns to be won in a principled and sustainable way.
As we describe later on, this can result in us adjusting ourapproach or launching products that better suit our clients’requirements. This, we believe, is a key part of stewardship,
while also helping to improving the long-term returns forclients and bringing sustainable benefits to the economy,
the environment and society. While recognising that we cando more, the feedback we receive and our client retention
suggests that we are being effective in serving the bestinterests of our clients and beneficiaries.
We believe our activities, particularly those undertaken
during 2022 described in this and other sections of thereport, reflect our commitment to fiduciary duty and oureffectiveness in embedding stewardship values across theorganisation. In particular, we continue to bring an evergreater focus on environmental and societal outcomes,
while recognising that there are opportunities for further
development. This process of evolution involves long-term
initiatives and a commitment to continuous improvement –values that are consistent with our Japanese heritage – butwhich are being increasingly honed by experience and theneed to comply with the highest international standards.

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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 Nikko AM Group Board of Directors, including Non-Executive Director and Chairman, Yoichiro Iwama, our Director andExecutive Chairman, Yutaka Nishida, and Director and Group President, Stefanie Drews. Our commitment to gender diversity
is reflected by the composition of our Group Board, where three out of ten members are female, while our commitment to
independence is ensured by having 60% of the Group Board as outside directors.
The Nikko AM 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. The chart below shows a simplified representation of our group governance structure.

Yoichiro Iwama
Outside Director and Chairmanof the Board of Directors

Stefanie Drews
Group President

Yutaka Nishida
Executive Chairman

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

Nikko AM Group’s supervisory and governance structure includes an audit and supervisory committee.
The role of the committee is to strengthen oversight and enhance our corporate governance framework.

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Principle 2

Stewardship Governance StructureGroup 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

Global Sustainable Investment Department

Local Stewardship OversightGovernance of stewardship activities operates at both theglobal and local subsidiary level. The overall oversight of
our ESG activities is the responsibility of the ESG Global
Steering Committee. It oversees the integration of ESG
within investment teams, sets policy and develops strategy,
makes external disclosures and recommends ESG-related
initiatives and participation in external bodies. The ESG
Global Steering Committee is governed by the GEC but, in
addition, reports directly to the Group Board. It is chaired by
the Global Head of Investment and members are the headsof 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). It is further supportedby the Sustainable Investment department who provides
dedicated expertise and administrative support. As well as its
monitoring and guidance activities, the Steering Committee

drives our implementation of the United Nations-supported
Principles for Responsible Investment (PRI).
As outlined under Principle 1, in 2022 we undertook
a project to create a new ESG framework to support
our existing global ESG community. The functions andobjectives of this team were outlined in Principle 1, while
its governance is illustrated in the chart below. It has
significantly expanded our ESG resources and added new
ESG roles in EMEA, Singapore and Japan, as well as bringing
under its wing our existing Japan Sustainable Investment
department (formally Active Ownership Group). We havemade Singapore our Sustainable Investment Centre of
Excellence, given the city-state’s advantages in terms oftalent, its time zone sitting between Japan and Europe, andits language capabilities. We will further build and develop
our team of ESG specialists during 2023. For more on ESG
integration, see Principles 7, 9 and 10.

Global Sustainable Investment Department Governance StructureGroup PresidentGroup Chief Investment Officer

Global Head of Sustainable Investment

Regional ESG
Specialists

Research andIntegration

Stewardship

Data & Reporting

ESG Regulation

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As part of the new structure, a Global Head of Sustainable
Investment, Natalia Rajewska, was appointed at a senior level,
based in Singapore. She reports directly to Group President
Stefanie Drews and Chief Investment Officer Hiroshi Yoh toensure that ESG matters have appropriate senior leadershipoversight. The underlying functions of the team report directly
to the Global Head of Sustainable Investment.
The core priorities of the Global Head of Sustainable
Investment centre around shaping our sustainable
investment strategy, building Nikko AM Group’s Global
Sustainable Investment department and working closelywith investment teams and other business functions in all
the regions to strengthen the firm’s ESG capabilities andprovide insight on broader ESG topics.
This mission is supported by senior leadership, with both
Ms Drews and Mr Nishida having specific key performanceindicators (KPIs) to improve the group’s ESG for the last
financial year. One result has been the close involvement ofsenior management in devising and introducing our new
Global Sustainable Investment team structure.
Further details on subsidiary level governance anddepartment biographies are described in the sections below.

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 in the Japanese

asset management industry, particularly in developing
stewardship policy in Japan. As a previous Chair of theCouncil of Experts on Japan’s Stewardship Code (a body
created by the Japanese Financial Services Authority), Mr
Iwama played a leading role in introducing the concept of
stewardship to the Japanese asset management industry.
He was then heavily involved in bringing in the Code as
Chairman of the Japan Investment Advisers Association from2010 to 2017, both in its original form in February 2014 andin later revisions in May 2017 and in May 2021. He has playeda crucial role in improving stewardship in the Japanese
asset management industry and corporate governance atinvestee companies. During 2022, Mr Iwama also served as amember of the Council of Experts Concerning the Followup of Japan’s Stewardship Code and Japan’s Corporate
Governance Code, which made recommendations about
revising the two corporate codes. Under Mr Iwama’s
supervision of the Group Board, we continue to strive for thehighest standards of governance and stewardship.
Our Group President, Stefanie Drews, 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. By the end of December
2022, the number of women in managerial roles had
reached 20% and was as high as 30% at Group Board level,
putting us on track to achieve our goal of 30% of managerial
positions by 2030. However, we see this as only an interim
goal on the way to parity.

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Subsidiary-level governance
Each Nikko AM Group subsidiary has an independent
executive team led by a regional head who reports to theGroup President and is responsible for formulating andexecuting targets and plans decided by the Group Board
and GEC in line with local regulations and customs. Eachregional office is required to present its ESG implementation

activities regularly to its respective board. The global andlocal stewardship framework is illustrated in the chart above.
There are differences in detail as to how these processes
operate at subsidiary level. To illustrate these variations, weoutline two regional examples below.

Stewardship oversight of Japanese investment functions
Our Japanese operations represent more than half thebusiness, so we devote a great deal of resources totheir governance and stewardship. The Stewardshipand Voting Rights Policy Oversight Committeemonitors and supervises our engagement withJapanese investee companies and proxy voting,ensuring that both remain in line with our fiduciaryand ESG principles and truly meet the interests ofinvestors.
The committee was launched in 2016 as a way ofenhancing the transparency of our stewardship activities
and strengthening our governance. Four out of thecommittee’s seven members are from outside the Nikko
AM Group, making it highly independent. Its decisions
carry weight, as it reports directly to the Group Boardon matters such as the governance of our stewardship
activities and conflicts of interest, ensuring, for example,
that proxy votes are used in line with our Conflict ofInterest Control Policy. For more on this committee, seePrinciple 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.

Our Japan Sustainable Investment department(previously known as the Active Ownership Group or“AOG”) that reports into the Stewardship and Proxy
Voting Committee, was set up in 2017 to enhance
the firm’s ability to: firstly, make judgements on how
to exercise voting rights and implement stewardship
activities in our Japanese portfolios; and, secondly,
conduct engagements with Japanese companies notalready covered by sector analysts in actively-managed
portfolios. As a result, even stocks which are held only inpassive portfolios are now subject to engagement.
The analysts in the Japan Sustainable Investment
department are responsible for conducting the risk
assessments we use to filter out from our investment
universe companies at high risk of governance failings.
They also provide the Japan-based investment teams
with other relevant ESG-related information derived fromtheir research and engagements. Department analysts
engage with large and mid-sized firms specifically on
ESG issues. The department was fully incorporated
under the Global Sustainable Investment department
in early 2023, when they also increased the breadth oftheir scope to cover all asset classes managed by ourJapanese investment teams. It is headed by our seasoned
specialists, Masahiko Komatsu and Kiyoshi Noda, whosebackground and experience are described further
below. Further detail about the departments activities isprovided under Principle 7.

Oversight of proxy voting at our Japanese entity
Board of Directors
ReportOversight/Resolution

Stewardship and Voting Rights Policy Oversight Committee
ReportOversight/Resolution

Stewardship and Proxy Voting Committee

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Principle 2

Stewardship oversight of UK investment functions
Our UK entity is responsible for stewardship activities
in the UK and Europe in collaboration with the Global
Sustainable Investment department. Given the significant
number of ESG regulatory developments in the EU andan increasing focus on ESG and stewardship in the UK,
we introduced new local governance in 2022 for ESG
regulations and standards, as well as stewardship.
Our review and adoption process for ESG regulations
and standards now works in three layers. The initialstage involves a dedicated team scanning the horizon
for ESG requirements that might affect the group. Any
that are highlighted are then reviewed and assessed by

Stewardship resources
Seniority, experience, qualifications, training anddiversity
It is our global network of more than 200 investment
professionals, with their wide breadth of experience, who
are at the forefront of our stewardship activities, aided
by our Global Sustainable Investment department. As
an organisation we are committed to sustainable andresponsible investing and our portfolio managers, analysts
and governance specialists all share in this commitment.
They apply this philosophy by implementing stewardship in
their day-to-day activities and practising active ownership.
They are compensated using a methodology that is
intended to align their interests and motivation with theoutcomes of client portfolios. Annual evaluations are
based on quantitative measures such as the long-term
returns of client portfolios (for example, weighted portfolio
returns for investment staff, or performance of securities
recommended for analysts), but also the qualitative aspects
of individual as well as group performance (for example,
quality of analysis and contributions to the team).
In recent years, all employees are encouraged to include
corporate sustainability goals in their annual performance
objectives. This has given staff the opportunity to think
about how they can practise sustainability in their roles.
We view this goal-setting exercise as part of a multi-year
process of weaving sustainability into our culture. Further
information on these matters can be found in our annual
Sustainability Report, which can be downloaded from theSustainability Insights section of our website.
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 plana dedicated working group comprising key business
functions. Lastly, requirements, impact assessments andrecommendations are presented to a newly-formed
board committee dedicated to ESG and stewardship.
Reporting on stewardship activities in Europe has beenfurther formalised with defined KPIs and summaries ofengagements presented to the newly-formed board
committee referred to above. Our aim is to continuously
improve the quality of our engagements throughrigorous challenge and oversight by key businessstakeholders.

that includes topics such as conflicts of interest, 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 andinvestment decision-making through the use of financial
modelling and in-depth case studies.
Our long commitment to ESG is reflected in the fact that welaunched Japan’s first socially-responsible investment fundas long ago as 1999. We now practise deep and direct ESG
integration across the firm, where every investment teamand department integrates ESG directly into their work. We
have a number of systems, platforms and forums that allow
our global investment teams to share research analysis on
events and issues, especially those that may not always becovered in the media. During the year we have invested inpeople, technology and ESG data extraction and integration
capabilities to ensure that we are able to provide thelevel of service required to meet the needs of our clients.
This investment has ranged from ESG-specific resources,
training in stewardship themes and client communications,through to the means to engage and monitor company
engagements on a larger scale.
An example of the training that was provided during 2022
is the dedicated sessions that were held with investment
teams across the globe to inform them of the backgroundand reporting requirements under the revised UK
Stewardship Code. This included presentation materials inJapanese to discuss examples of best practice. We believethat these sessions have had a meaningful impact on ourreporting for this submission.

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Principle 2

Systems, analysis and service providers
Institutional Shareholder Services (ISS) is used to execute
our proxy voting, which we consider a key activity infulfilling our stewardship responsibilities. ISS also provides
research and customised voting recommendations basedon our voting and responsible investment policies, although
the ultimate decision on how we vote is taken in-house. Ourinteraction with ISS is discussed in more detail under our
responses to Principles 8 and 12.
As part of the creation of our Global Sustainable Investment
department in 2022, we established a centralised ESG
data team (shown in the Global Sustainable Investment
department governance structure chart earlier) to help
provide consistency, accuracy and improve the coverage of
our ESG data, as well as expanding our analytics capabilities. In
2022, we hired Zishan Cheema as our first specialised ESG data
analyst, sitting under the Head of Strategic Analytics and Dataand Global ESG Data & Reporting Lead, to begin this process.
This strengthening of the team goes hand in hand with plans
to expand our external ESG data sources, for example, throughthe acquisition of advanced climate analytics tools.
The ESG data team now works with a variety of stakeholders
across the firm. The team has focused on analysing andintegrating data sets we acquire from our primary ESG data
provider for use by investment and client reporting teams.

This has included enhancing our ability to identify and assessclimate-related risks and opportunities (linking to our workon the Task Force on Climate-Related Financial Disclosures,
which is explained in more detail under Principle 7). The
team also works on a variety of regulatory reports, plays a
key function in providing data to prove our compliance with
the EU’s Sustainable Finance Disclosure Regulation, and has
been charged with developing leading ESG data capabilities
to meet our evolving needs.
Data from external service providers are 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,
ISS and Bloomberg.
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 arisingfrom differences in methodology, therefore in our active
strategies, we treat these data as supplementary to our
proprietary research, as further outlined in Principle 8.

Below are biographies of key members of the Global Sustainable Investment department:
Natalia Rajewska, Global Head of Sustainable Investment
 s Rajewska joined Nikko AM Group in 2021 from ING Bank in Singapore. She started inMsustainability consulting in 2013 and has worked over the years in sustainable investment
and finance in banking and asset management. She had been involved in sustainable
development and social change since 2008. At ING she rose to VP covering APAC clients,
having originated and structured some of the market leading and world’s first sustainablefinance instruments. Prior to ING, Ms. Rajewska worked at Aviva Investors as an ESG analyst.
She has also worked at Corporate Citizenship, a sustainability consultancy, and at an impact
investment foundation in Singapore.

Deborah Loke, ESG Analyst
Ms Loke has had previous roles at UOB Asset Management and Maitri Asset Management,
where she was an ESG investment analyst covering the Asia Ex-Japan region, supporting theinvestment teams in ESG analysis, stock picking, and stewardship activities. She joined Nikko AM
Group in 2022.

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Yukari Kaito, ESG Specialist, Sustainable Investment, Japan
 s Kaito joined the Nikko AM Group Investment Support & Planning department as an ESG
MSpecialist in December 2018. Prior to joining Nikko AM Group, 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 organisation and increasing corporate ESG
disclosure. Prior to this, she worked for more than five years as an ESG analyst, most notably
as a principal analyst overseeing ESG research on over 1,800 companies, providing advice on
proxy voting and engaging with boards on behalf of clients.

Masahiko Komatsu, Acting Co-Head, Sustainable Investment, Japan r Komatsu is based in Tokyo and co-leads the Stewardship function in the Global Sustainable
M
Investment department with a particular focus on ESG integration. He joined Nikko AM Groupin April 2021 and led the Japan Sustainable Investment department. Prior to joining Nikko AM
Group, he worked for four asset management companies, including Prudential, Schroders andPolar Capital, mainly as a Japanese equity analyst. He has contributed to corporate governanceimprovements at Japanese listed companies, including playing a leading role in collaborative
engagement with foreign institutional investors. He holds an MBA from Waseda Business
School and is also a chartered member of the Securities Analysts Association of Japan.

Kiyoshi Noda, Acting Co-Head, Sustainable Investment, Japan r Noda joined Nikko AM Group in August 2022 as an analyst in the Japan Sustainable Investment
Mdepartment focusing on ESG research, proxy voting and company engagements. Prior to joining
Nikko AM Group, he worked as a fund manager for nearly 20 years and changed roles to lead the
responsible investment section at MU Investment Company. He holds a BA in Economics from Keio
University and is a chartered member of the Security Analysts Association of Japan.

Ken Kajiyama, Senior Stewardship Specialist, Sustainable Investment, Japan r Kajiyama joined Nikko Securities Investment Trust & Management, one of Nikko AM Group’sMpredecessor firms, in April 1993. After serving as a fund manager for five years, he took on therole of equity research analyst, where the sectors he covered included steel, non-ferrous metals,
trading companies, marine transportation and pulp & paper. In 2018, he joined the Japan
Sustainable Investment department as a proxy voting and engagement specialist, a role which
he served concurrently with that of equity analyst. Since 2019, he has served as a dedicatedproxy voting and engagement specialist. He holds a BA in commerce from Chuo University andis a chartered member of the Security Analysts Association of Japan.

Kozue Saito, Stewardship Specialist, Sustainable Investment, Japan s Saito joined Nikko AM Group in 2007 as a fixed income analyst. In 2011, she changed rolesM
to become a value style analyst on the Value Strategy Fund Management team. Since 2018, she
has served concurrently as a proxy voting and engagement specialist in the Japan Sustainable
Investment department, focusing on ESG research, proxy voting and company engagements.
Prior to joining Nikko AM Group, she was a corporate credit risk analyst at Gibraltar Life
Insurance Company, where she started her career in 2003. Her credit background gives aunique perspective to her bottom-up company analysis. Saito holds a BA in Law from Aoyama
Gakuin University. She is also a chartered member of the Security Analysts Association of Japan.

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Hiroki Wakita, Stewardship Specialist, Sustainable Investment, Japan r Wakita joined Nikko AM Group in 2017 as an analyst in the Japan Sustainable Investment
Mdepartment, focusing on ESG research, proxy voting and company engagements. Prior tojoining Nikko AM Group, he worked as a Japanese equity analyst at Citigroup Securities. He
began his career at Mizuho Securities in 2009, first working in sales of Japanese equities toinstitutional investors and later on initial public offerings. He holds a BA in Economics from
Tokyo University and is a chartered member of the Security Analysts Association of Japan.

Taro Egami, ESG Integration Specialist, Sustainable Investment, Japan r Egami joined Nikko AM Group in March 2023 as an ESG Integration Specialist in the
M
Japan Sustainable Investment department. Prior to joining Nikko AM Group, he performed
investment analysis, shareholder engagement and firmwide ESG integration at a Singaporebased engagement fund. He began his career at the Investment Banking Division of Citigroup
Global Markets Japan Inc., working on domestic and cross-border Mergers and Acquisitions aswell as transaction financing. He holds a Bachelor of Agriculture from Kyoto University, majoredin Environmental Economics. He is a certified member analyst of the Securities Analysts
Association of Japan.

Amisha Patel, ESG Specialist
Ms Patel is based in London. She joined Nikko AM Group in 2014, having previously held rolesat Wellington Asset Management and GAM. She supports our UK-based investment teams
with their implementation of ESG policies and initiatives, stewardship activities and company
engagements on pertinent ESG issues.

Harry Wilson, ESG Regulatory Lead, EMEAMr Wilson joined Nikko AM Group in 2022 from Alpha Financial Markets Consulting, where heled client projects in ESG and regulatory risk and compliance. Prior to Alpha, Mr Wilson heldroles at Capgemini and Aon Hewitt. He is responsible for identifying, assessing and developing
Nikko AM Group’s responses to UK and European ESG regulations.

Aria Goudarzi, Head of Strategic Analytics and Data and Global ESG Data &Reporting Lead
 r Goudarzi joined Nikko AM Group in 2014 from Macquarie Investment Management andM
has played a significant role in building our performance and data solutions capabilities,
running teams in Europe and globally. He is responsible for working with the Global Head of
Sustainable Investment in creating the firm’s global ESG data strategy, as well as enhancing
reporting capabilities.

Zishan Cheema, Senior ESG Data Analyst
Mr Cheema joined Nikko AM Group in March 2022. Prior to this he had 16 years’ experience in avariety of front office roles, including equity analysis and portfolio management, in both active
and passive investment strategies. His most recent experience was working as head of researchat a fintech startup focused on ESG analytics for retail investors.

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These significantly expanded resources allow even closer
collaboration and co-ordination with investment teams
and other key business stakeholders, such as sales andsales support staff. Amongst other things, the enlarged
department’s duties include conducting ESG research andintegrating it into our investment processes. This will see
ESG analysts embedded in investment teams, supported byintegration and thematic specialists. The new department
will also be involved in enhancing our ESG data andanalytics capabilities and ensuring that we take a proactive
approach to capturing and integrating regulatory andmarket standards in relation to ESG. Our work in expanding
our ESG resourcing is not done, however, we will be further
expanding the team in 2023.

OutcomeAs a group we are committed to active stewardship. Our
governance structures and stewardship processes address
several areas, including the management of conflicts of interest,
engagement in active and passive investment management,
our sustainability efforts and information disclosure.
In 2021, we recognised the need to enhance our ESG
capabilities as an organisation, including in relation to
stewardship. As a result, and as outlined throughout thisreport, we made significant organisational changes during2022. Central to them was the establishment of the Global
Sustainable Investment department, with resources allocatedto ESG research and integration, stewardship, ESG data andreporting capabilities and ESG regulations and standards.

Additional roles were created as part of the new department
in 2022 and we expect additional hires in 2023. Ms Rajewska
was appointed to manage the department as the new Global
Head of Sustainable Investment. The fact that she reports
directly to our Group President and Chief Investment Officer
is testimony to the importance we give to stewardship andbroader ESG activities as an organisation. The department has
already improved how we review and integrate ESG factors
across our product range and significantly enhanced our ESG
data and analytics capabilities.
In Europe, during the year we created and formalised
new governance structures relating to our stewardship
activities, as well as improving our understanding of, andresponse to, ESG regulations and standards. Lastly, we
further underscored our commitment with specific ESG andstewardship KPIs assigned to both our Group President andour Executive Chairman for the 2022 financial year.
As stewardship needs and expectations are continuously
evolving, we will continue to adapt and fine-tune our
responsibilities and activities as stewards of our clients’capital. This means ensuring that we have the rightresources, governance and incentives in place to support
our responsibilities to the economy, the environmentand society. We understand that effective stewardshiprequires continuous improvement, and we aim to criticallyevaluate our approach and implement meaningful changes
wherever and whenever required.

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Principle 3
Signatories manage conflicts of interest to put the best interests of clientsand beneficiaries 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 conflicts ofinterest and maintain and operate arrangements to minimise
the possibility of conflicts giving rise to a material risk ofdamage to the interests of our clients. We have establisheda Group Conflict of Interest Control Policy (addendums towhich can be applied at the subsidiary level in line withlocal requirements), which has been designed to prevent us
from prejudicing the interests of customers in the conductof our business and is reviewed at least annually. Potential
new conflicts are considered as part of any new businessdevelopment and/or business process changes.
In addition, group subsidiaries maintain their own conflictsof interest registers which record potential conflicts thathave come to light during their activities and the measurestaken to resolve them. Each register is regularly reviewed
and approved by the relevant subsidiary board of directors.
Group subsidiaries may also add local addendums to thegroup policy, changes to which are reported to the local
boards and the Group Board as per the process describedunder Principle 5.
More details about how our conflicts of interest policies
operate can be found in the Activity section below. However,in general, when identifying the types of conflict of interest
that may arise, we take into account, as a minimum, whether
we or any of our directors, managers or employees or aperson directly or indirectly linked to the firm:●●●

is likely to make a financial gain, or avoid a financial loss, atthe expense of a client;has an interest in the outcome of a service provided to aclient or of a transaction carried out on behalf of a client
which is distinct from the client’s interest in that outcome;has a financial or other incentive to favour the interest of
one client or group of clients over the interests of another;●●carries on the same business as the client; and/or
receives or will receive from a person other than the client
an inducement in relation to a service provided to theclient, in the form of monetary or non-monetary benefits,
other than the standard commission or fee for that service.

Responsibility for controlling transactions and otherconduct likely to give rise to conflicts of interest is managed
by our Compliance departments. Together, the group
Compliance heads are charged with maintaining theconflicts of interest control framework and periodicallyverifying its effectiveness, as well as continuously striving
to improve it. They are also responsible for communicating
all aspects of conflict control to employees througheducation 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 Global
Executive Committee.
One area where conflicts can arise is as a result of ourownership, where there is potential to treat a related groupcompany more favourably than an unconnected company.
Nikko AM Group is ultimately owned by Sumitomo Mitsui TrustHoldings (SMTH), which is a large Japanese conglomeratewith interests in, amongst other things, banking, pension
administration, real estate, stock transfer, custody services, andasset management. Nikko AM Group 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. An up-to-date list of relatedgroup companies is maintained in the appendix of the Group
Conflict of Interest Control Regulations. In addition, the namesof related group companies, including two additions in 2022, as
well as that of our publicly-listed parent, are kept on a restricted
list at local subsidiaries to help prevent any potential conflicts.
Other possible conflicts are listed in the table below.

Our Corporate Structure
Sumitomo Mitsui Trust Holdings, Inc.

Nikko Asset Management Co., Ltd.

Related Group Companies

Nikko AM Group Subsidiaries

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Activity
Examples of potential conflicts of interest related to stewardship that may arise during the course of business and how wemanage them 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
our businesses to manage conflicts of interests.
These policies and procedures are subject to ournormal monitoring 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 oversightof other companies are excluded from agenda
items where Nikko AM’s stewardship activities
involving such companies are discussed.

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An area of particular focus for our efforts to control conflictsof interest is voting. We assess our voting conduct every
quarter at a regional level and publish an annual summaryof our firm-wide voting activity on our website.
An example of our quarterly monitoring is thework of our Stewardship and Voting Rights Policy
Oversight Committee, which meets every threemonths to review votes on individual proposals frominvestee companies that might trigger a conflict ofinterest. A regular item on the committee’s agenda isreviewing votes involving related group companies
and confirming that there is no bias in favour of therelated group company. In addition to related groupcompanies, including the parent company, thecommittee also judges the exercise of voting rights
on listed customers, business partners, and financial
institutions that sell our products. In doing so, thecommittee is aided by advice from our proxy voting
agency, ISS. Approximately 1,500 resolutions werereviewed by the Stewardship and Voting Rights Policy
Oversight Committee during 2022. There were no
instances where the committee deemed that there
was bias in the way that votes had been cast.
We firmly believe that such reviews of individual votes help
us to increase the transparency of our stewardship activities
and minimise conflicts of interest when we exercise ourvoting rights. We believe that having the reasons for our

voting decisions reviewed by the independent oversightframeworks, such as those displayed in the Governance ofStewardship Activities structure under Principle 2, helps
us manage potential conflicts of interest and facilitates
constructive engagement with investee companies. For
more on our voting activities, see Principle 12.
As we do every year, we identified new scenarios in 2022
that may cause potential conflicts and these have been
incorporated in local policy, as set out in Principle 5.
Amongst the amendments to local policy were revised
disclosure requirements, including the widening of thedefinition of outside interests from directorships to any
outside business interest which must be reviewed by theCompliance department.

OutcomeNo actual conflicts of interest arose during the year thatprevented us from performing our stewardship activities inaccordance with the best interests of our clients.
We believe that our thorough management of conflictsof interest helps to maintain the trust of both clientsand investee companies and allows us to conduct our
stewardship activities more effectively. Our everyday
stewardship activities, such as proxy voting, are governedby the management framework and supervision functions
described above, including our policy for managing
conflicts of interest.

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Principle 4
Signatories identify and respond to market-wide and systemic risks
to promote a 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 in promoting 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 market-makers
and related participants, dialogue with companies, sell-side research, independent researchvendors, 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.

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 Global Executive Committee via the Chief Risk Officer. The department
oversees our risk management framework, keeping track of our exposure to a number of risks,
including market risk, counterparty risk and liquidity risk, in order to ensure our portfolios arealigned to meet 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

Investment Risk Management Department

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Principle 4

A number of measures, such as scenario analysis and stresstesting, are used to monitor exposure and the resilienceof our portfolios to market shocks. In addition to theseroutine measures, ad-hoc stress tests are run in response todeveloping market risk. These stress tests may cover short –or long-term time horizons and use various macroeconomic
and firm-specific assumptions.
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 forour clients. Actions taken will depend on the nature of therisk, the asset class of the strategy and also the style of theindividual investment team, but may range from a review
of portfolio holdings to ensure their suitability for the given
market environment to a rotation into other instruments.
During periods of market upheaval, we might also increaseliquidity in our portfolios, either by increasing cash balancesor by switching into more liquid instruments. This might
be to provide a buffer to market volatility or to give us theability to deploy cash when buying opportunities emerge,
or both. We must also remain alert to the need to ensurethat liquidity is sufficient to meet client redemptions.

Managing emerging and systemic risks
Emerging systemic risks and their impact on companies orindustries are discussed at regular investment meetings.
Financial markets faced a number of challenges in 2022 –geopolitical tensions such as the ongoing Russia-Ukraine
conflict and Sino-US policy differences, global inflationary
trends, quantitative tightening and increases to interest
rates, as well as the ever-present hazards of climate change,
to name just a few. The impact of each challenge varies
depending on the nature of the asset class and the makeup of each individual portfolio. As a result, the way that
our teams respond to these challenges, varies in order totry and position portfolios to ensure the best outcomes.
In our passive portfolios for example, our operations teamrebalances portfolios frequently to ensure a low tracking
error versus the respective benchmark and aims to keeptransaction costs to a minimum. How we have identified
and addressed risks across our active strategies aredescribed in the examples that follow.
Another example is in fixed income, where we hold monthly
meetings to review 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.
These meetings are led by our Global Fixed Income teamand the purpose is to address fundamental challenges to thesmooth functioning of global fixed income markets and what
we can do to mitigate those challenges for our clients.

The Group’s Risk OversightCommittee reviews the firm-wide
stress-test and scenario analyses
and their impact on the firm’s
business at its quarterly meetings
To aid the analysis that feeds into the regular meetings, theGlobal Fixed Income team uses a portfolio dashboard to
help monitor market and systemic risk from a quant level togive an understanding of the range of risks from a numberof angles, including regions, countries, maturity buckets,
capital structures, currency, ratings and sectors, as well as
the concentration of risks and portfolio limits. This processprovides a high-level picture of global fixed income andcurrency markets, with each region and traded currency
being assessed against macroeconomic, microeconomic,
technical and valuation factors, helping us to navigate thecurrent environment for global risk.
This scoring process provides the investment team with agauge of the risk and risk appetite in the market, while also
providing a one-month forward-looking view. The portfolio
managers meet regularly to discuss information andresearch on the current condition of fixed income markets.
The regional scorecards provide background for these
discussions, along with our currency 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 ispaid to central banks’ policy stances, governments’ fiscal
positions, financial stability, and domestic and geopoliticaldevelopments. 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 in the market.

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Below we show an example scorecard from January 2022, when the investment team was debating threats from inflation,
growing labour shortages and an increasing inclination by the US Federal Reserve to raise rates and reverse quantitativeeasing, as well as growing geopolitical risk around the Ukraine crisis. The colour coding – red for “risk off”, green for “riskon” and a spectrum in between – provides a visual indication of how risks were being viewed across core and peripherycurrency markets by the team at the time.
Fixed income risk scorecard
Qualitative

Quantitative

Duration (1 Min to 5 Max)
Median Team
View

Quant

FX (1 Min to 5 Max)
T-1

Δ

Median TeamView

FX (over) Under

Quant

T-1M

Δ

FX (over)
Under

Duration
RSI(30)FX Rank

10yr Bond
over (Under)

RSI(30)

Factor
Rank

USD

2.0

2.0

2.0

0.00

4.0

1.0

4.5

-0.5

-5.7%

46.70

14

0.69%

51.6

10

AUD

2.0

1.0

2.0

0.00

3.0

3.0

3.0

0.0

5.6%

45.00

8

1.68%

50.0

13
11

NZD

2.0

2.0

3.5

-1.50

3.0

4.0

3.0

0.0

6.5%

36.80

6

1.01%

53.4

GBP

2.0

3.0

3.0

-1.00

3.0

5.0

3.0

0.0

10.1%

55.20

3

0.28%

45.8

8

CAD

2.0

5.0

2.0

0.00

3.5

4.0

3.0

0.5

9.2%

48.90

4

-0.64%

46.7

1
14

SEK

2.5

1.0

2.5

0.00

3.0

5.0

3.0

0.0

13.4%

45.30

2

2.09%

45.9

CHF

3.0

4.0

3.0

0.00

2.0

3.0

2.0

0.0

5.5%

46.70

9

0.00%

0.0

6

NOK

3.0

3.0

3.0

0.00

3.0

4.0

4.0

-1.0

6.6%

44.80

5

0.16%

49.7

7

EUR – Core

2.0

5.0

3.0

-1.00

2.0

3.0

2.0

0.0

6.1%

45.30

7

-0.46%

46.4

2

EUR – Periphery

4.0

4.0

0.00
3.8%

46.56

10

-0.42%

47.3

3

JPY

3.0

5.0

3.0

0.00

2.0

2.0

2.0

0.0

EM

2.8

3.3

2.8

-0.08

2.8

2.5

2.9

-0.1

MYR

2.5

3.0

2.5

0.00

2.5

1.0

2.5

0.0

-5.0%

45.86

13

0.45%

54.2

9

MXN

3.0

4.0

3.0

0.00

3.0

2.0

3.0

0.0

3.1%

50.63

11

-0.24%

72.1

4

PLN

2.5

4.0

2.5

0.00

2.5

5.0

2.5

0.0

18.2%

43.87

1

-0.01%

54.9

5

SGD

2.5

2.0

2.5

0.00

3.0

2.0

3.0

0.0

2.2%

47.93

12

1.61%

44.3

12

CNY

3.0

3.0

0.00

3.0

3.0

0.0

ILS

3.0

3.0

0.00

3.0

3.0

0.0

This risk analysis helped guide the team in positioning bond portfolios to meet the threats they faced. For example, asinterest rates rose in major economies throughout the year, portfolios were adjusted to reduce their sensitivity to those rises
and thus limit price depreciation. Similarly, the team actively traded currencies based on both near and longer-term viewsof expected strengths and weaknesses in order to limit downside risk and attempt to profit from opportunistic positioning
where possible.
Systemic risks come in many forms and require many different methods to deal with them. An example of a geopolitical risk
is shown by the case study below and examples of climate-related risks are illustrated later in this section:

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Principle 4

Case study: Anticipating the shock to markets of the forced de-listing of Chinese companies
from US stock exchanges (fixed income)Issue: The Asian Fixed Income team identified thepotential for widespread de-listing by Chinese companies
from US stock exchanges as a market-wide risk inDecember 2020, following passage of the US Holding
Foreign Companies Accountable Act. This required
foreign companies to comply with audits by the US
Public Accounting Oversight Board (PCAOB). Under thelegislation, non-compliance for three consecutive years
would result in forced delisting from US stock exchanges.
While the law would apply to all companies from any
country, it was aimed at Chinese companies listed in the
US. The US regulator identified more than 100 Chinesecompanies that were at risk of trading prohibitions fornot complying with audit requirements. The lack oftransparency at Chinese companies has long been aconcern amongst investors, but Beijing has until recently
resisted the calls for more disclosures on grounds ofnational security.
Finally, in August 2022, China agreed to allow US officials
to inspect the audit work done on Chinese listedcompanies. The PCAOB inspectors and investigators
have since been able to review the audits done oncompanies based in both mainland China and HongKong. They have said that they will release a report on
their findings in the first half of this year.
Action: Shortly after these risks came to light, the teamassessed the possible impact to companies of a forced delisting, as well as the impact on our portfolios. In terms ofcompanies, the team came to the following conclusions:●●Companies’ access to capital markets would be
impaired and could even mean them losing animportant source of funding.
De-listing could disrupt the market and affect thetrading liquidity of the secondary market.

When assessing the possible impact to our universe,
the effect was seen as being much smaller, with only
a few companies likely to be hit. In terms of credit
ratings, there were expected to be no immediate rating

downgrades as the regulator had allowed a three-year
grace period for Chinese companies to comply with thelegislation.
Internally, the team placed the companies affected on“underweight”, although several cross-market factors werealso in play, then and later. As well as the threat of forced
de-listing, there were wider Sino-US tensions, increased
pressure from China’s domestic market regulatory
crackdown and the drag on the economy caused by
China’s zero-Covid policy. As a result, the Chinese techsector, potentially a major victim of the US legislation, wasboth volatile and underperforming in 2022.
Outcome: Despite the concessions made by Beijing, therisk of forced de-listing remains. The full findings of the
PCAOB will be reported soon and stringent enforcement
against any companies that fail the audit review is
expected from US regulators.
However, there are reasons to be cautiously optimistic.
Recent media reports suggest that there have been
positive steps on both sides. Moreover, the team believes
that most of the companies at risk of forced de-listing
have taken the necessary mitigating and/or pre-emptive
measures to limit the impact. Some of the measurestaken include:●●

Several state-owned enterprises have already delistedfrom US exchanges in anticipation of not being able tomeet the disclosure requirements on national security
grounds.
Some companies are seeking secondary listings on the
Shanghai and Hong Kong stock exchanges in order tomaintain their quoted status.

We believe that many companies have been working
hard to achieve full compliance as they value their
US listing. In the meantime, we continue to monitor
developments and, from a credit perspective, we aresticking with companies that have strong balance sheets
and limited reliance on overseas markets.

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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 and one
which we consider it is our fiduciary duty to address inmanaging 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
and support global initiatives to address the issue,
such as the UN’s Paris Agreement to limit carbon
emissions and the UN’s Sustainable Development
Goals. We are involved in Asia with other fundmanagers seeking to collaborate to address the issueof climate change, of which more details can befound under Principle 10. We are signatories to, andparticipants in, many environmental initiatives, bothglobally and locally. Our commitments under the
Net Zero Asset Managers initiative, as detailed underPrinciple 1, is one example and our implementationof the recommendations of the Task Force on
Climate-Related Financial Disclosures (TCFD), as
detailed under Principle 7, is another. Other collective
initiatives in which we are involved are describedtowards the end of this section.

2. Addressing climate-related portfolio risks:
We see climate-related factors as both a key ESG risk
and a potential opportunity for the companies in which
we invest. Climate change is therefore factored into theinvestment processes of our teams across asset classes toensure our investments are aligned to properly address
both the risks and the opportunities. For example, for
our Asia Ex-Japan equity and fixed income, we apply an
investment risk management process to the monitoringof greenhouse gas emissions primarily for discretionary
accounts. This process is performed by the Investment
Risk department, which monitors the carbon emissionof each portfolio against its applicable benchmark on
a monthly basis based on agreed measurements andthresholds. Should a portfolio exceed its threshold, theInvestment Risk department alerts the portfolio manager
who subsequently evaluates the holdings. We do not
exclude any company purely based on high carbon
emissions but rather we evaluate the company’s plans
for the transition to net zero. For companies that havecredible transition plans, they will be placed on a “whitelist” which allows the portfolios to hold that company
despite its current emissions level. Should the portfolio
manager be unable to justify that a company has acredible transition plan, they will either trim the holdings
to bring the portfolio’s carbon emissions down to below
its threshold level or divest.

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Principle 4

Case study: Monitoring portfolio climate change risks and opportunities (equity)
Activity: In addition to engaging with individualcompanies on their ESG commitments, the Global
Equity team also engages across portfolios toestablish a two-way channel of communication
with investee companies.
In 2022, the team contacted companies held in our
Global Equity strategy. There were several specificobjectives of this project:
●

●

●

●

●

to ensure that investee companies understood ourcommitment to supporting the transition to a low
carbon future, as well as our stewardship priorities andthose of clients;
to ensure that the companies were aware of theteam’s obligations and expectations as signatories of
initiatives such as Climate Action 100+ and the Net
Zero Asset Managers initiative;
to ensure the team had a baseline understandingof the strategies being employed by each of theinvestee companies to guarantee that they continued
to generate stakeholder value and sustain revenue
streams through the transition to a lower carbon
environment (e.g. adoption of Science Based Targets orother commitments already or likely to be adopted);
to verify the Scope 1, 2 and 3 greenhouse gas
emissions (i.e. direct and indirect emissions and thosefrom connected parties, such as suppliers) reported
by our primary third-party ESG data vendor and any
associated reduction targets;to establish whether management had performed
assessments of the physical and transition risks
associated with climate change and/or the effect ofany carbon pricing, if it were to be introduced.

Outcome: The team received good responses froma number of investee companies as a result of thisengagement. As expected, some are further along thisjourney than others, due in part to their wide dispersion,both by geography and sector. Overall, the portfolios havea significantly lower carbon footprint than their wider
benchmarks. To a degree, this is because the team tends
to underweight traditional oil and gas companies, which
it does not think represent good long-term investments
for clients. Given the importance of climate change, thisis an issue the team will continue to raise with investee
companies in the years to come, both in order to keep
track of their progress and to encourage greater disclosureand best practice where we believe our influence asowners can encourage positive change.

Our investment approach focuses on ESG integration.
We therefore continually strive to recognise andunderstand the risks and opportunities of climatechange in our clients’ portfolios, as well as improving
our methodologies for assessing them. This includes
appreciating the scientific implications of global
warming and the structural changes likely to affectthe business environment of the investee companies
we analyse. For an illustration of how this operates inpractice in our Japanese Equity portfolios, see our casestudy “ESG factors drive decision to sell major Japanesemeasuring instrument maker” in our response to
Principle 7.
Climate change is an issue that is likely to affectall sectors, albeit on different scales and timelines.
Some impacts are direct, such as carbon taxes, whileothers are indirect, such as the effects on ecosystems
and biodiversity. Beyond known effects, we also
acknowledge that systemic changes may arise fromthe increased instability of physical systems as global
temperatures rise. Below we list some of the impacts
we consider:●●●

the regulatory and operating environment, which
influences the degree of adaptation and vulnerabilityof companies to climate change;
the physical impact on business activities, which will
differ between 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 researchtools and analyses, such as carbon footprinting, shadow
pricing and by identifying our exposure to assets
considered to be at higher risk of being “stranded” by
the move towards a low-carbon economy. More detailon our approach to climate change can be found in our
Position Statement on Climate Change, our TCFD Report
and the content and case studies under Principles 7
and 10. Further, in 2022 we have started to use andanalyse climate-related ESG data and apply them to ourportfolio holdings. Further details, and an account of thechallenges we face, can be found under Principle 8.
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 andoffsets: it purchases carbon credits and retires them on
our behalf to balance our emissions.

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Principle 4

 ollaboration to promoteCwell-functioning 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.
We participate actively in forums and events, publish
thought leadership articles and engage with a wide range ofstakeholders, including clients, members of the investment
management industry, policy makers and civil society.

An important way in which
we promote well-functioning
financial markets is through ourparticipation in industry bodies
and forums
Each of our subsidiaries is a member of the applicable local
regulatory and industry bodies, for example the Investment
Association in the UK. Members of our UK subsidiary have joined
the IA’s peer-to-peer knowledge sharing forums such as the Net
Zero Forum, the SFDR Implementation Forum and the TCFD
Implementation Forum. Some of the members of the Nikko AM
Group take an active role in these bodies. For instance:●●●

Yoichiro Iwama, the Non-Executive Director and Chairmanof our Group Board, continued to serve as a memberof The Council of Experts Concerning the Follow-up
of Japan’s Stewardship Code and Japan’s Corporate
Governance Code. The Council was established for the
purpose of monitoring the use and adoption of Japan’s
Stewardship Code, launched in February 2014, andJapan’s Corporate Governance Code, which came into
force in June 2015, as well as further improving corporate
governance of all listed companies in Japan.
Eleanor Seet, the Chief Executive Officer of our Singapore
subsidiary, is Deputy Chair of the Executive Committee of
the Investment Management Association of Singapore(IMAS), a representative body of investment managers
spearheading the development of the industry in
Singapore. She also chairs the Conference Organising
Committee of IMAS, which organises networking events
such as the IMAS-Bloomberg Investment Conference 2022,
of which more details are provided in the case study below.
Also in Singapore, Kenneth Lim, our Joint Global Headof Operations is a member of the Environmental Risk

Management Working Group, which was formed tohelp develop the Monetary Authority of Singapore’s
MAS Guidelines on Environmental Risk Management
for Asset Managers.
Nikko AM Group staff helped organise and participated ina number of conferences and panel discussions during theyear, being keynote speakers in several. For instance,
Nikkei Gender Gap Conference/Bloomberg Women’s
Buy-side Network Panel: Our Group President, Stefanie
Drews, participated in a panel discussion entitled“Companies of choice and diversity: The forefront of female
career development and male childcare leave” at the Nikkei
Gender Gap Conference, quotes of which have been
published in the Financial Times. She also told her career
story, addressing inclusive culture and successful diversity
and inclusion initiatives, at the Bloomberg Women’s Buyside
Network Panel, and she was profiled in the January issue of
the Japanese women’s magazine President Woman.
Organising Committee of the Investment Management
Association of Singapore: As chairman of the Investment
Management Association of Singapore (IMAS) Conference
Organising Committee, Eleanor Seet helped shape theconference format, agenda, and provided guidance tothe IMAS Secretariat in arranging the IMAS-Bloomberg
Investment Conference 2022. The IMAS-Bloomberg
Investment Conference 2022 attracted over 800 participantsfrom 25 different countries interested in learning to bebetter stewards of capital and drivers of new standards andapproaches that blend profit with purpose, while adapting
to Asia’s economic landscape. The 2022 conference theme
was “Stewarding Capital Towards New Horizons: Investing fora Greener Future”.
Impower Edge: Sustainable Innovation:
Davina Goodall-Smith, Chief Operating Officer of our UK
subsidiary, was a member of this panel discussing theavailability and use of sustainable data, associated risks andhow to avoid greenwashing, as well as different regulatory
approaches and the implications for managing a global
business. She highlighted the importance of integrating ESG
and sustainability throughout the entire operating model,
starting with the asset manager itself, through investment,
and onwards to regulatory and client reporting. She alsoelaborated Nikko AM Group’s approach to labelling under
the EU’s Sustainable Finance Disclosure Regulation (SFDR),
emphasising that integrity is key and that labels should truly
reflect existing investment processes.

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Principle 4

The European Sustainable Finance Conference of
the Association for Financial Markets in Europe: Cyril
Lustac, Conducting Officer in our Luxembourg subsidiary,
participated in this panel discussion looking at how
investments could be made sustainable even if they did notmeet the definitions set out by the taxonomy of the EU’s
action plan on financing sustainable growth. He reminded
the panel and the audience that the EU’s taxonomy
allowed asset managers to develop their own sustainable
investment processes. Although the EU taxonomy should
be seen as the gold standard, it was not the only approach
and was probably not well adapted to investee companies
beyond the EU. He pointed out that the EU taxonomy could
sometimes be too stringent in its quantitative demands,
given the availability and quality of data. However, it could
be used to identify both best practice and the key elementsthat any sustainable investment process should have.
Pension & Investment Conference: Johnny Russell,portfolio manager in our Global Equities team, gave the
keynote speech in Japan on “Stakeholder Capitalism – Whatis it and Why Should Investors Care?”. He focused on how
stakeholder capitalism pertains to asset management.
With the pendulum swinging from shareholder capitalism
to stakeholder capitalism, investors are using ESG and the“three P’s” – planet, people and profits – to help shape abetter and more sustainable tomorrow. It is important
for asset managers and owners to recognise the seismicchange towards stakeholder capitalism that is taking place.
For asset managers “there is a huge opportunity to add
value for their clients with a deeper understanding of thechanges within business and how client capital is making
an impact. There is a lot the investment community can do”.
A subsequent Q&A session allowed the audience to discuss
further the different definitions of stakeholder capitalism indifferent geographies, such as Japan and Europe.

ESG World Forum/InvestOps/CDO BFSI Exchange:
Aria Goudarzi, our new Head of Strategic Analytics andData and Global ESG Data and Reporting Lead, was partof multiple panels discussing how to support sustainablegrowth using ESG data as a strategic measure to drive
profitability, efficiency and risk avoidance and how tosuccessfully acquire, store and provide ESG data to meetrising ESG data expectations and enable more informed
investment decisions. He also gave a keynote speech
on “Creating an ESG Data Strategy to Support Strategic
Decision Making”, outlining the approach taken to create ourgroupwide ESG data strategy and why it was important to
get as much information as possible from all key stakeholders,
including the investment teams, multiple vendors and ESG
regulation specialists.
In addition to our attendance at events, we also publish or
contribute to thought leadership material and white papers.
For example, Davina Goodall-Smith contributed to thewhite paper “Embracing Digital Innovation: How the buyside is utilising data and technology to integrate ESG and
optimise business growth in 2023” published by S&P Global.
This paper covered the findings of a 2022 survey of theheads of investment operations and similar staff at buy-side
firms across Europe to find out about challenges they faced
and how they were responding.
Other initiatives we support, participate in or are signatories
to include:
●

●

●

●

●

●

The Asian Utilities Engagement Programme of the Asia
Investment Group on Climate Change (further details canbe found under Principle 10 and the case study there),
CDP (carbon, forests, water),
Climate Action 100+ (further details can be found underPrinciple 10),Global Investor Statement to Governments on the
Climate Crisis,International Corporate Governance Network,
Net Zero Asset Managers initiative (further details can befound under Principle 1),●

Principles for Responsible Investment,●

Task Force on Climate-related Financial Disclosures,●

The Investor Agenda,●

Women’s Empowerment Principles.

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OutcomeOverall, we believe both our processes and our actions
demonstrate that we have remained effective in identifying
and addressing market-wide and systemic risks during theyear, ranging from the ongoing Russia-Ukraine conflict andthe surge in inflation to forced labour and the perennial
threat of climate change. We believe our case studies showthat our investment teams have been both responsive andcreative in reacting to these risks during 2022.
In addressing these risks, our guiding principle has
been – as always – to put our clients first. This means our
immediate reaction has been to position clients’ portfolios
to ensure the best outcomes for them. We are a small player
in a large investment market but, by ensuring our clients’assets are directed responsibly, we can play our part inensuring that capital is directed intelligently and ethically insupport of well-functioning markets and a greener future.
And this is a multi-way process. While our first duty is
to clients and their portfolios, we have not been slow toremind and educate company managements about the big
threats they face. This may be market risks, such as thoseaffecting Danish mortgages, or it may be ESG risks, suchas exposure to companies with material climate changerisks. In this latter category too falls our Global Equity team’s
initiative to poll companies on their carbon reduction

strategies, approaches to wider ESG initiatives and to informthem of our policies. All this activity supports policy-makers
and regulators in their work of maintaining smoothfunctioning and responsibly-run markets.
On a wider front, one of the more useful ways of identifying
new systemic risks and dealing with existing ones is todebate them with other industry participants. We havethoroughly involved ourselves in a wide range of industry
initiatives, addressing a multitude of new threats andopportunities, from ESG investment developments andtightened regulation to improving data and encouraging
more use of digital technology to tackle ESG threats.
One area where it is less easy to judge progress in the short
run is climate change. This is due to the long-term natureof the risks that this poses and uncertainty around evolving
policy developments and technological innovations. We
will continue to enhance our strategies and methods tomonitor and calculate the climate effects of our investment
strategies, while developing approaches that minimise
global warming. In doing so, we will continue to engage
with other stakeholders in our effort to promote wellfunctioning markets.

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

Activity
Risk governance and oversight
At a group level, responsibilities for our risk governanceand oversight are split according to the “three lines ofdefence” model:●●●First line of defence: Front office business
units and individuals identify and manage risks
in their business function that could threaten theachievement of their objectives. They accept risks
within assigned limits of risk exposure and are
responsible and accountable for identifying, assessing
and controlling the risks of their operations.
Second line of defence: The support functions, such as
Risk Management and Compliance, assess and oversee
risk at the firm level, developing and maintaining risk
frameworks, including firmwide policies. Each of these
support functions, in close relationship with the front
office business units, ensures that the risks of the businesshave been appropriately identified and managed.
Third line of defence: The Internal Audit function
provides independent and objective confirmation of
the design and effectiveness of internal controls, i.e. it
independently assesses the effectiveness of the processes
created in the first and second lines of defence andprovides assurance for these processes.

Policy & procedure review
All of our policies and processes, including our stewardshippolicies, are subject at least annually to a review andassurance process to ensure that they remain appropriate
and effective. The review process varies depending on
the substance of the policy, but in principle it is as follows:
creation and drafting (for new policies), revision by theapplicable department, and, if relevant, review by theappropriate committee, then review by either the subsidiaryboard, in the case of local policies, or the Global Executive
Committee and Group Board, in the case of global policy.
The key policies that are applied to stewardship activities arelisted below, with any changes made during 2022 detailed
in the Outcome section. (We have not detailed policies lessdirectly related to stewardship, but they follow the same
review process described above.)●Group Code of Ethics and Business Conduct●

Group Diversity and Inclusion Policy●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

Internal and external assurance
In terms of audit and assurance, we have a number ofinternal checks and balances provided by, for instance,oversight committees that include independent nonexecutive directors, as well as our Compliance department.
Our policy is to audit each division every two years, with afollow-up to ensure implementation of any corrective action
identified as a result of the audit. There were no substantial
internal audit issues raised during 2022.
Various stewardship activities are audited by outside bodies.
At the most basic level, they include our external financial
auditors, who audit our annual accounts, but we are also
assessed by a number of other independent auditors. For
instance, under SSAE18 (for the US) and ISAE3402 (for the
rest of the world), independent auditors assess our control
procedures and their effectiveness, service delivery, information
security and controls over data privacy. No substantial matterswere raised during the 2022 external and independent audit.
As signatories of the UN-backed Principles for Responsible
Investment (PRI), we gain further external assurance throughour regular assessment by that organisation. This covers a rangeof stewardship-related activities, including our responsible
investment policy, coverage and objectives, conflicts of interest
policy, governance and human resources, performance
management and rewards, personal development andtraining, collaboration and promotion of responsible
investment. The PRI assessment is designed to provide us withfeedback to support our understanding and development ofresponsible investment, which we subsequently process andintegrate into our activities where applicable.

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Our collaboration with industry organisations ensuresthat we stay up to date on the range of issues that areimportant to investors and the wider market and keeps ourpolicies and processes up to date. As well as the PRI, theseorganisations include the regulatory and collaborative
investment initiatives that our subsidiaries are members of,as set out in Principles 4 and 10, respectively.

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 locally andreviewed by the local Compliance department. However, theultimate judges of whether our reporting is fair, balanced andunderstandable are our clients, with whom we work closely.
For instance, we have had relationships spanning decadeswith many of our institutional clients. Reporting has therefore
evolved over time, not only in line with market norms –including an increased emphasis on ESG – but also as a result of
our knowledge 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 required under other codes, such as
those for Japan, are produced and reviewed by the relevantgroup companies.

Review and sign off process for our reporting
under the UK Stewardship CodeTo produce this report, we have brought together a numberof internal teams from across the firm, including our Global
Sustainable Investment department, ESG specialists,
Compliance, Operations, global investment and members of
our Client Services teams. We have used both internal andexternal resources to make it as informative and accessible
as possible. It has been reviewed by our local stewardshipgovernance, as well as being reviewed and approved by
the UK and Group Boards and signed off by our Group
President, Stefanie Drews.

Our collaboration with industry
organisations ensures that westay up to date on the range
of issues that are important toinvestors and the wider market
and keeps our policies andprocesses up to date

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Principle 5

Outcome
We believe our combination of internal checks andbalances, external assurance and audits and ourwidespread involvement in industry and regulatory
bodies ensures that our policies, procedures andprocesses are subject to continuous and rigorous review.
To be effective, such review has to result in action toensure that our policies, procedures and processes are
kept up to date and effective. Keeping that in mind, we
made a number of changes to key policies that apply
to stewardship activities as a result of our review andassurance processes during the year:●●●

A number of group policies, including the ESG Global
Steering Committee Charter, Global Trading Policy andGlobal Best Execution Policy, have undergone changes
relating to their internal structure, making reference tothe internal Management Regulations and accordingly
referring to applicable changes in policy owners
and subsidiaries.

●

Updates to our Standards for Exercising Voting Rights on
Japanese Stocks came into effect in 2022, strengthening
our criteria for the selection of directors. Specifically, theratio for independent outside directors was increased,
the absence of gender diversity on boards was agreed asa possible trigger to vote against members’ re-election(to be applied in 2023), and the standards for the
independence of outside directors were clarified andreinforced. Additionally, insufficient measures to manage
and address climate change and sustainability were added
as issues that could trigger votes against directors.

Changes because of reviews of policies less directly related
to stewardship that took place during 2022 included achange to the compliance and risk management regulations.
We amended the definition of compliance risk to clarify
that conduct risk is included in Nikko AM Group’s definitionof compliance and to emphasise the importance of thehandling of conduct risk under the existing risk framework.

Group Conflict of Interest Control Regulations – weamended the appendix of related group companies toreflect recent changes.
Group Conflict of Interest Control Regulations –subsidiaries may add local policies and addendums to theGroup policy, with changes to local versions during 2022
listed below:– The UK based Compliance department added several
new potential conflict scenarios under a number ofheadings: broker/counterparty selection, fair allocationand participation in investment opportunities, proxyvoting and related-party transactions and close
personal relationships. Other changes included
amendments to execution controls and allocation
procedures, as well as a general tightening of
disclosure requirements.
– The Luxembourg-based Compliance department
amended the local policy to ensure that there werereferences to key ESG themes, such as the integrationof sustainability risk. The amendment included
consideration of the potential conflicts of interest that
could give rise to greenwashing or the mis-selling or
misrepresentation of investment strategies.

●

Group Engagement and Stewardship Strategy – this global
strategy was developed during 2021 and reviewed andapproved by the ESG Steering Committee in 2022. The
strategy formalises our engagement and stewardship
activities, ensures unity across regions and allows us to sharewith the market our global engagement commitments.

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Principle 6
Signatories take account of client and beneficiary needs and communicate theactivities and outcomes of their stewardship and investment to them.

Context
A breakdown of our AUM (as at 31 December 2022) by asset class and client domicile is shown under Principle 1. Below wefurther present AUM by client segment4 and AUM by geography of the managed holdings.
AUM by client segment

ETFs
44.3%

AUM by geography of asset class

Retail33.0%

Other (inc. Emerging
Market) 2.5%

Money Market
14.8%

Global
21.3%
Institutional
22.7%

Japan
53.1%

EMEA 1.3%
North America 2.0%
Australia & New Zealand 1.3%

Asia Ex-Japan 3.7%

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. The largest segment of our client base is in Japan, mainly investing in equities. Where wehave retail clients, access to our products is through collective investment schemes via third-party distributors and we haveto adopt a different approach when talking to this segment as opposed to our institutional investors. The former requireeasy-to-digest material that is clear, brief and well presented. The latter expect more direct, sometimes more technical andcustomised communication, with the amount and timing determined by our contractual relationships.

The ETFs relate to a number of funds replicating equity benchmarks. Owing to the structure of these vehicles, it is not possible for us to know the underlying ownership of the funds andtherefore we are unable to classify them as owned by either institutional or retail investors.

4

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Principle 6

Investment time horizons
Whether they are retail or institutional, we believe most of ourclients are best served taking a medium – to long-term viewof their investments. We are not dogmatic about what thismeans in reality, but broadly view this as a holding period of
three to five years for medium-term investing and ten years ormore for long-term. For retail investors, we would argue thisfits their need for long-term savings and best allows them toride out the fluctuations in financial markets, thus maximising
the value they can obtain 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 long-term horizons. Of course, this overarching
philosophy must be tempered by circumstances: politicaland economic events may require us to curtail our typicalholding periods to reduce risks for clients. In contrast, as partof our TCFD project, referred to under Principle 7, we look toalign time horizons for the consideration of climate-relatedrisks and opportunities to longer-term scenarios, in particular
as these relate to 2030 and 2050 net zero commitments. As
displayed in Principle 1, nearly 15% of our groupwide AUM at
the end of December 2022 was held in cash equivalents ormoney market funds, which typically have a shorter holding
period of up to one year.
These perspectives are reflected in our communications withclients, which tend to focus on trying to explain long-term
economic and market trends, including demographic shifts
and the fate of globalisation in a less open world. They arereflected too in our policy of integrating climate change andother ESG considerations into the investment processes.
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-understand materials
that explain our investment approach, product risk
characteristics and fees, as well as tools that help themunderstand their investments and the risks involved. As isstated in the Context section above, a large segment of
our AUM is managed for retail investors via intermediaries
and, in terms of geographic location, the majority of ourclients are based in Japan. We have therefore focused on
our communication with Japanese investors in the Retailinvestors section below.
The COVID-19 pandemic changed the way wecommunicate with our clients. We assembled theinfrastructure needed to handle events remotely during
the pandemic by setting up digital seminars and training
sessions. This enabled us to provide customer support
without in-person meetings. We were also able to help
distributors in their efforts to service their retail customers
by supplying them with information quickly, accurately andconcisely through a wide range of media. As a result of ouractive promotion of remote seminars and training sessions,
we have built up a hybrid communications strategy, using
both traditional in-person and online approaches, that isboth robust in the face of widespread disruption and allows
greater flexibility and breadth of content in our interactions
with clients.

Retail investors
We run 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 areprimarily 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, not only
concerning the specific funds in question but also related
to broader themes, such as the economy and markets. Our
aim with our communications aimed at retail investors is
to ensure they understand what is happening with theirown investments and the reasons, while fostering a deeper
understanding of markets and investment trends.
Realising that there are wide differences in the level offinancial sophistication amongst our retail investors, wetailor our communications to the differing audiences within
the group. Thus we provide videos on our website aimed atboth distributors and end investors. For example, we might
support a particular fund with:●videos aimed at first-time viewers to promote the fund;●videos that explain the concept of the fund in more detail;●regular videos and other materials that keep the clients
up to date with performance and underlying factors that
affect the fund.

We 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 information material produced under the Nikko AM Fund Academy brand
Item

Frequency

Rakuyomi (easy five-minute briefing)

Twice weekly

Koyomi (quick soundbites)

Monthly

Gokuyomi (deep dive)

Ad-hoc(four released in 2022)

Market 5 Minutes

Monthly

Weekly Market

WeeklyDate Watch (compilation of major index performance and market trends)

WeeklyFollow-up memo (commentary from our chief strategist, Naoki Kamiyama,
on major market events)

Ad-hoc(five released in 2022)

Global REIT Weekly

WeeklyMonthly Market

Monthly

Japan In Motion

Quarterly

Nikko AM Newsletter

Ad-hoc(three released in 2022)

China Insight

Ad-hoc(12 released in 2022)

Kamiyama Reports (market update reports by our chief strategist)

Ad-hoc(16 released in 2022)

Kamiyama Seconds! (quick updates by our chief strategist)

Ad-hoc(50 released in 2022)

Why should we invest?

Ad-hoc(one released in 2022)

What Nikko AM wants you to know about money management

Ad-hoc(one released in 2022)

Global Foresight

Quarterly

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Principle 6

Seeking retail client views
This is not just about us talking and our clients listening.
We take the views of our distributors seriously as they arein frequent contact with their clients and are therefore a
key conduit in passing retail investors’ views back to us.
This feedback is an important guide for us, both in thematerial we provide for distributors and in the design of
new products. There are several ways in which we seek
the views of both distributors and, in some cases, retailinvestors directly.
A significant amount of effort in the Tokyo-based retailbusiness is spent on an extensive programme of seminars
conducted by around 50 dedicated personnel. Theseseminars are planned and organised for individual branches
for audiences of roughly 200 distributors at a time. Suchseminars can be divided into:●●

on-site seminars for retail investors, where a distributor
invites its customers to one of its branches, andstudy sessions for sales representatives of distributors.

In both cases, speakers from Nikko AM Group visit thefinancial institution to give presentations which last typicallyfor about 60 minutes.
In the 2022 calendar year, we have held seminars bothonline and in person. The content of these seminars
and investor feedback was successively reported to
relevant managers by the in-house customer relationshipmanagement system, enabling them to both stay abreastof recent developments and changes in investors’ anddistributors’ views.

customer relationship management system. In addition,
there is an internal process so that particularly importantcomments, particularly any strong views of our distributors,
are brought to the attention of senior sales managers
without delay.
While we cannot know directly what our retail clientsfeel about our retail communications efforts, weregularly receive favourable endorsement from third
parties. For instance, in 2022:
 or the fourth year in a row, we were placed firstF
in the annual mutual fund company satisfaction
survey conducted by Rating and Investment
Information, Japan’s largest rating agency.
We were similarly ranked number one for thefourth year in last year’s branding survey by
Nikkin, the Japanese news agency.

 e were also placed first in the latest asset
Wmanager 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.

We organise annual events under the umbrella of the
Nikko AM Product Strategy Academy targeting the
product planning teams of our distributors. In addition toproviding information on existing products, we also present
ideas for new products that are expected to meet future
investor needs. These are valuable opportunities for open
communication with our distributors, enabling us to receive
candid views directly from the teams responsible for fundmarketing. For instance, we poll participants after the many
presentations on new product ideas. Those that receive
strong support in these votes are often then realised in new
fund launches. Our most recent Product Strategy Academy
was in November 2022, with over 130 participants from 84
financial institutions from across Japan attending in person.
To gather all this feedback, our staff in Tokyo regularly
contact distributors’ headquarters and local branches. This
information is then added to views gathered directly fromretail investors who have contacted our call centre teamand is shared with relevant Nikko AM Group staff via the

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Principle 6

Dealing with bad news
Perhaps the acid test of client communication is how
well an asset manager talks clients through difficult
markets and portfolio losses. As it happened, 2022
turned out to be a year of headwinds for some ofour thematic funds focused on innovation that had
attracted a great deal of assets in previous years
but significantly underperformed in 2022. Not
surprisingly, this was a source of disappointment for
many of our distributors and their end investors.
We were quickly aware of investors’ dissatisfaction
through our contacts with both the local branches
and the headquarters of our distributors, as well as
directly from our call centre team. This triggered urgent
discussions within our sales and sales support teams
as to how to respond and enhance our information
disclosures to calm the anxieties of investors.
Guided by the feedback we received, we substantially
increased the production of ad-hoc “spot reports”
addressing the points of concern coming fromour distributors and investors. These reports were
circulated to our distributors and posted on our
website, ensuring that we responded quickly to
our investors’ feedback. During the whole year,
we produced 50 such spot reports for our seveninnovation funds. To put that into context, in anormal year, we would typically create only one
ad-hoc report per fund, which emphasises just how
importantly we regarded the concerns of bothinvestors and distributors.

Institutional investors
It is our policy as a group to tailor the frequency andmethod of communication with institutional clients to meettheir specific requirements. These are typically discussed
and agreed as part of negotiations when the investment
management agreement is set up, but the heart of ourcommunications with institutional clients is our direct
discussions. Our sales directors and client services teams
work with clients to confirm the required content andtiming of all regular client reports. In addition, we scheduleinvestment reviews at least annually, and can arrange ad
hoc meetings as required by the client.
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.

on 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 dedicatedmeetings once a year, although we may report on proxyvoting, company engagement and other stewardship
activities more frequently as clients require. Before thesemeetings, we typically submit information on a range of
topics. Information may include our stewardship policy,
implementation framework, company engagements
and their effect, and third-party assessments of our ESG
integration and stewardship activities (for example, thelatest Principles for Responsible Investment assessment).
To meet clients’ requirements, we are also able to provide
reports on carbon intensity and other carbon-related
disclosures, ESG scores and related information, for thecompanies in which we invest. Further information on our
engagement policy with investee companies is available
under Principle 9.
We typically explain our voting decisions in some detail,including how we dealt with specific proposals and, inparticular, where we voted against management proposals.
We also discuss occasions where views within the firm
differed and how internal consensus was reached. Further
information on our proxy voting policy and how we voted
can be found under Principle 12. How we cast our proxyvotes and the number of company engagements weundertook during the year are disclosed on our website.
In addition, we hold regular corporate sustainability
meetings with clients, typically on an annual basis, to reporton 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 society.
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.

Regular meetings with our institutional clients are a twoway process. As well as the normal discussions and reports

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Principle 6

Case study: Aligning an investment portfolio to meet the client’s ESG preferences (equity)
Issue: An insurance company client with a segregatedJapanese investment portfolio wanted to raise theclassification of its mandate with us under the EU’s
Sustainable Finance Disclosure Regulation (SFDR),
which is aimed at improving ESG disclosures by asset
managers. Specifically, the client wanted to move theportfolio from the lower classification provided by Article
6, which does not require sustainability as an ultimate
aim, to one complying with Article 8. This higher “lightgreen” classification requires the portfolio to promote
environmental and/or social characteristics, while
following good governance practices.

Outcome: After about eight months of discussions
between the client, our investment team, the Japan
Sustainable Investment department and our global
ESG staff, we reached agreement on an Article 8
proposal. This was reviewed by the client’s responsible
investment specialists and modified as required in linewith their feedback. Having been agreed with the client,
the changes required to upgrade the portfolio werethen agreed by our internal Product Committee andimplemented in July 2022.

Case study: The Danish mortgage bond market – an example of end-client and broker
engagement (fixed income)As part of our 2022 submission, the Global Fixed Income
team outlined the role of Nikko AM Group as a bridge
between Japanese investors and the Danish mortgage
bond market. The case for investing in the market
includes its depth of issuance, liquidity, and quality
in terms of being predominantly AAA-rated. These
attributes mean it offers a valuable diversification andincome stream compared to domestic Japanese bonds.
Initial positions in the market were taken by Nikko AM
Group clients as long ago as 2016, at which time ourholdings were enhanced by beneficial hedging, but
those benefits have since been gradually eroded. And
while the market has generally proved to be robust
and resilient in both favourable and difficult market
conditions, it experienced falls in 2022 in line withmost other bond markets on the back of increasingfears of tightening monetary policy in Europe. As bondprices fell, concerns grew that some Japanese clientswould become forced sellers of their positions, owing
to the structures and rules of their funds, notably if themarket price fell below the original purchase price ofthe bonds. Our London-based investment team worked
extensively with investors to provide the backgroundto the prevailing market conditions and, in particular, todemonstrate that price movements were not out of linewith other markets. Moreover, concerns about muchhigher inflation and much tighter monetary policy inDenmark seemed overdone and, with the peak of therate cycle nearing, domestic investors were confident
that the market would find a good level and recover.
A key aspect of a significant number of direct client
meetings over this period was to support clients whowanted to disinvest in a way that helped them avoid
selling at the lowest prices. Client sales did occur, butwere largely executed in recovering markets. Moreover,clients were able to make decisions from a position thatembraced the fundamental arguments in favour of themarket, even if the changing cost of hedging might havealtered its attractiveness from a Japanese perspective.
Outcome: Our intervention during this market volatility
often strengthened our client relationships, as weformed a key bridge between investors on the one handand brokers and issuers on the other. The increased
communication did not halt outflows, but allowed them
to be well managed and probably lower than they mightotherwise have been, as some investors took stock of
their positions before the market stabilised.
Our role as a bridge was two-way, with domestic brokers
keen to understand the changing sentiment amongst
overseas holders. This ongoing dialogue with brokers
and issuers helped ensure flows were well managed
and did not overwhelm or surprise local players. Indeed,some did not even realise the extent of overseas sales.

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Principle 6

Case study: Helping pension fund clients prepare to sign Japan’s Stewardship Code (equity)
Issue: We manage Japan equity portfolios for several
corporate pension funds which were consideringsigning Japan’s Stewardship Code. Being a signatory of
the Code ourselves,5 we were able to organise meetings
with specialists from our Japan Sustainable Investment
department who are well versed in the Code’s principles
and well able to provide relevant materials. These
discussions often expanded from an explanation of thebasic concepts of the Code into a wider debate about
its key points, the merits and demerits of accepting theCode for asset owners, and broad trends relating to
stewardship activities.

Outcome: This process helped our clients deepen theirunderstanding of the Code and related initiatives. One
client requested further help in drafting its own policy
to enable it to fulfil its responsibility as an asset ownerunder the Code. We drew up a list of items to monitor
and proposed a stewardship structure that would allow
it to perform its duty towards its plan participants.
On the back of the assistance we provided, the fund
was able to publicly announce its commitment to theCode. This was an encouraging example of sharing
best practice. We will continue to encourage ourinvestee companies to benefit from our knowledge ofthe practical application of stewardship, just as we willcontinue to be educated by their experiences.

Case study: Incorporating client feedback into our company engagements (equity)
Issue: An example of how we use feedback from clientsto adjust our interactions with investee companies
emerged from recent discussions with a Japanesepublic pension fund whose Japan equities portfolio
we manage. The client indicated that, while it waspleased with the frequency and content of our company
engagements, the management framework for how weengage could be enhanced. This observation was basedon extensive experience as well as peer analysis by theclient of all its investment managers.
Outcome: This feedback prompted us to enhance
our internal engagement platform, covering the Japan
Sustainable Investment department, research analysts
and portfolio managers – so that we could strengthen
collaboration within the investment division. We alsoenhanced our milestone management approach forcompany engagement in order to more closely track the
progress and effects of our activities.

In future, our focus will be on selecting issues or areasthat require improvement at investee companies.
Progress towards targeted goals will be closely watchedand further steps laid out according to the stage aspecific engagement has reached. Monthly reviews ofoutstanding issues and the status of engagement will
be conducted by specialists from the Japan Sustainable
Investment department and shared with researchanalysts and portfolio managers. A more detailed
analysis of the engagement plans and progress todate by the company will be performed at least on anannual basis, following which engagement goals may be
upgraded, materially revised or scrapped.
In terms of this particular Japanese pension fund client,
we relayed to it our enhancement plans and gave our
assurance that they should go a long way to meeting
the request for enhanced engagement. Nonetheless,we will continue our discussions with the clientwith a view to further improving the quality of ourstewardship activities.

https://en.nikkoam.com/stewardship-code

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These discussions help to confirm that we and ourinstitutional clients understand each other and that theirviews are accurately shared with all the relevant people in thefirm, particularly the investment teams. In order to maintainclose communication with our institutional clients, we focus
on face-to-face interaction via online and/or offline meetings
although we also use other methods of communication.
Our client-facing personnel spare no effort in seeking
detailed feedback, confirming whether explanations given
at meetings are sufficient and generally ensuring that clients’
expectations and requirements 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-based
Client 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 and manyof these are subsequently fed through to the teams on the
ground for a further response. Portfolio managers typically
visit Japan on a regular basis and, in addition to updatingclients 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 bond market to clientsand prospective clients. Some clients have also sent theirrepresentatives to London as a means of learning about
the market and its day-to-day workings. These contacts
strengthen our dialogue with clients and our understandingof their needs.

OutcomeGiven that our largest 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, describedabove. These third-party endorsements of our retail
communications provide testimony to our success ingetting our message across to retail clients.
We increasingly use retail client feedback to shape and drive
our communications , for example by addressing specificpoints of concern in the reports that we produce. Both our
distributor network and our call centre team are essential ingarnering, understanding and making use of this feedback.
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
Service 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.
We are very ready to make changes to the strategies
we employ based on client views, for instance, bystrengthening our ESG integration or using additional
investment techniques (e.g. derivatives) to better meetclients’ needs. As outlined in the case study above(“Incorporating client feedback into our company
engagements”), such feedback was instrumental inprompting us to enhance our internal engagement
platform to both consolidate and better manage ourengagement activities. By the same token, we constantly
strive to enhance the regular reporting of 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, the attributes of
securities in mandates had not been properly reflected or
updated in the order management system, which resulted
in erroneous purchases of securities, or there were changes
due to external factors outside of our control, such as
market movements. There were also a few instances ofdeviation from the client proxy voting guidelines causedby the conflict between our guidelines and those of theclient. In all such instances, we immediately addressed
the situation by clarifying the cause, taking the necessary
remedial steps, and implementing preventative measures.
We also provided a full explanation to our clients, in linewith regulatory requirements and best practice and, if
necessary, made additional efforts to eliminate any future
ambiguity in the interpretation of clients’ investment andproxy voting 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 thatstewardship, including fiduciary and ESG considerations,
are inherent to long-term corporate value creation andcontribute to the realisation of sustainable economic
growth. We therefore see ESG issues as an integral part ofour 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 givena remit to act in the best interests of our clients within
the global and local governance frameworks provided
by the Group. This means that our ESG integration andengagement processes are bespoke to each investment
team, ensuring each chooses the methods mostappropriate 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 class and regional differences, our
Global ESG Steering Committee via the Global Sustainable
Investment department is responsible for monitoringand improving the investment teams’ implementation of
stewardship principles. Whilst the local approaches may
differ, this global process ensures there is consistency acrossthe firm. We believe that it results in a structure that enables
us to serve the best interests of our clients.
ESG issues are rarely the only consideration when making
investment decisions, but an understanding of theseissues informs the investment process and gives ourinvestment teams a more rounded view of companies. In
applying ESG policies and procedures to their particular
circumstances, our investment teams consider a numberof factors, including (but not limited to) the environment,
climate change, human rights and labour standards,
talent management, product safety, diversity, board
structure and independence, alignment of remuneration,transparency of ownership and control, and accounting.
An acceptable ESG standard is never the sole determinant
for investment, however, where materially negative ESG
issues are identified and we do not believe that corrective
measures will be taken, the relevant investment team willtake appropriate action which may include excluding thecompany from investment consideration. For existingholdings, an indication of material deterioration in ESG

factors may lead to a rating downgrade and subsequentsale from the portfolio.
This is not a one-off exercise but rather a process ofcontinuous assessment. ESG considerations are applied
before investing, while holding an investment and before
selling. In addition to our own policies and considerations,certain issues may be given priority because of feedback
from our institutional clients, either at the inception of amandate or as the mandate evolves over time. We also
maintain 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 withanalysis for proxy voting resolutions, we share any updates
to our responsible investment and voting policies. The
service level agreement with ISS defines the relationshipat a group level, but each subsidiary works directly with
ISS to tailor its local platform to accommodate any criteria
required, including those relating to ESG.
Since the creation of the ESG data team in 2022, we havefocused on improving the availability, as well as the quality,of the data being used by investment teams. A primary focus
has been to ensure that our data are accurate, timely andconsistent across all investments covered. One important
service provider which we currently use for the provision of
ESG data analysis is MSCI. As part of an internal project, whichis continuing, we have had several calls, teach-ins and email
discussions with MSCI to ensure we both understand andknow how to use the data it supplies. The results of thesesessions then feed into discussions between the ESG data
team and the investment teams to decide how to use thedata in practice.
We also engage with MSCI when we see errors and try toresolve them in a timely manner. We go into more detailabout this under Principle 8. In addition to liaising with
MSCI, the ESG data team contacts our portfolio companies
to verify the data being supplied by third parties, and toencourage climate-related disclosure and target setting inline with the Science Based Targets initiative (SBTi), which isfurther discussed later in this report. We would view successhere as being confirmation that the ESG data used in our
analysis and client reporting accords with what we arereceiving on the ground from companies.
Further information on how we interact with and hold toaccount our service providers can be found in our responses
to Principles 8 and 12.

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Climate change
Amongst the most important ESG issues, we recognise
climate change as the greatest the global community
faces. We therefore consider it a fiduciary principle that
we must address when managing our clients’ assets.
We reinforced our commitment to this principle andoutlined our approach to climate change in 2019,
when we published our Position Statement on Climate
Change. In 2022, we reinforced this with a project
to widen and deepen our implementation of therecommendations of the Task Force on Climate-Related
Financial Disclosures (TCFD), as outlined further below.
The current position statement contains the fourbuilding-blocks of our approach:
1. enhance in-house analytical capabilities;
2. collaborate with the investment community;
3. conduct active stewardship; and4. report on our activities.
While these are the outlines of our approach, we
do not seek to regulate how each investment teamputs principle into practice in their own investment
processes. However, in all cases we do believe that
active dialogue and exercising voting rights on climatechange, where appropriate, can lead to positive
outcomes for investee companies, our clients andour firm. We participate in relevant collaborative
corporate engagement activities, such as the Climate
Action 100+, to communicate our expectations toinvestee companies (see Principle 10 for more on ourcollaborative engagement activities).
We generally do not apply blanket exclusions ofinvestments based on climate change factors unlessdirected 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 be for our clients, for the broader economy
or for the environment. We believe that exclusions
based on formulaic filters to determine climate risks canbe inflexible at times and in some cases might fail tocapture the future potential of companies to respond to
the transition to a low-carbon economy.
We believe that thorough research and vigorous debate
within the teams, as well as direct engagement withcompanies to get a first-hand appreciation of the issues,

are still the best ways to evaluate ESG factors and judge
their impact on investment outcomes. We also recognisethat climate-related impacts are complex and uncertain,
so we need to keep abreast of scientific findings andinformation, and how regulators and stakeholders are
responding to them.
While we take account of our own climate change
principles in our portfolios, we also work with clientsto provide low-carbon investment solutions alignedwith their specific investment beliefs. For example, our
Global Green Bond Fund is a low-carbon collective
investment that invests in securities that finance climatechange mitigation and adaptation projects, ensuring
the highest level of transparency for investors who wantto avoid “greenwashing”. Launched in 2010, the strategy
invests in bonds issued by AAA-rated sovereign issuers,“supranational” bodies, such as the Asian Development
Bank and European Investment Bank, and agencies,
such as the US Federal National Mortgage Association(Fannie Mae). We also have a Hydrogen Fund managed
by our Global Equity team, which enables our clients
to participate in the financing of the green hydrogen
economy and the transition away from fossil fuels.
As a signatory of the TCFD and in line with its
recommendations, we encourage our investee
companies to take the following steps:●●●

identify material climate change risks andopportunities in a range of scenarios (including where
the global temperature rise is kept below 2°C) overappropriate time horizons;
integrate material climate change risks andopportunities into their overall business strategy andrisk management;
disclose the management policies and processes
they have designed to meet the goals – and resulting
performance – that emerge from the above activities.

We recognise the need to continually enhance andimprove our efforts in relation to climate change andin 2022, we took a further step by initiating a global
project to assess and enhance our response to therecommendations of the TCFD, which includes purchaseof advanced climate analytics data. The outcomes of thiswork will be published in our next version of the TCFD
report in 2023.

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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 to be taken into
account in stock selection.
ESG factors are thus rooted in our investment philosophiesand processes and not treated as being part of a separate
exercise. We strongly believe that attention to ESG factors
is 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 sustainableeconomic growth. Given this view, we endeavour toincorporate 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 the complexity. Each of our investment teams
is therefore allowed to view ESG implementation throughits own lens, leading to diverse approaches across theorganisation. Whatever the approach, we strive to apply all
ESG policies to the highest standard, continually seeking
improvement and innovation.

ESG risk analysis is integrated into the investment researchfunction rather than outsourced to a separate team. Eachinvestment team is responsible for the assessment of risks
that may affect the success and long-term sustainability ofholdings in the portfolio. Our detailed process – including
stress-testing investment candidates, stock selection andportfolio construction – also helps to ensure that the wholeinvestment team is engaged in managing 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. The Global
ESG Global Steering Committee reports to the Group Boardand in our UK subsidiary, the regional investment teams are
required to present their ESG implementation activities tothe local 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 into the investment process

Japanese Equities

●

●

●

ESG is integrated into all investment decisions in these portfolios through the use of a selection
process based on “Creating Shared Value” (CSV) evaluations. CSV evaluations come from thework of Harvard University Professor Michael Porter, which found that the creation of social
value leads to economic value.
We have used our own CSV evaluations as part of our investment process since 2013. They
currently comprise 12 factors grouped into three categories – ESG, competitiveness andfinancial strength. See our case study: “ESG factors drive decision to sell major Japanesemeasuring instrument maker” for an example of how we integrate this assessment into ourmanagement of Japanese equities.
Engaging constructively with company management in relation to our key themes:
E: Action for a Decarbonised Society,
S: Human Capital and Productivity,
G: Effective Governance.

●●

Exercising voting rights, including voting against director appointments where the firm faces
serious risks related to climate change or sustainability issues, where management initiatives toaddress them are deemed insufficient and where the situation is not deemed to be improving.
Proxy voting is executed in the interests of our clients in line with our proxy voting guidelines.
See Principle 9 for more on our approach to engagement.

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Principle 7

Asset class

How we integrate ESG and stewardship responsibilities into the investment process

Global Equities

●

●

●

●

●

●

Asia Ex-Japan
Equities and China
Equities●●

New Zealand
Equities

●

●

●

●

●

Global Fixed
Income●●HOME

ESG analysis is undertaken by each portfolio manager and fully integrated into the stockpicking 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 todetermine 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 through its ESG Fund Ratings service by scoring our global
equity portfolio, which is rated AAA as at the end of December 2022.6
Proxy voting is executed in the interests of our clients in line with our proxy voting guidelines.
ESG analysis is incorporated into company research, security selection and portfolio
construction. Our ESG “Materiality Map” focuses on the material issues and opportunities foreach of the companies we cover, based on ESG factors from the Sustainability AccountingStandards Board (SASB) and MSCI.
As part of our in-house proprietary ESG scoring methodology, individual companies are scoredon ESG pillars, alongside fundamental analysis which is aggregated to provide a companylevel score. ESG-focused research is also used to identify areas for company engagement andimprovement. (For how this applies in practice, see our case study: “Improving ESG disclosures
at a large Singaporean agribusiness”).
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
and opportunities faced by a company.
Portfolio companies with low ESG scores are targeted for engagement in an effort to lift thebar in weak areas or where improvement would be beneficial to stakeholders.
We are also proactive in finding and addressing wider issues affecting New Zealandcompanies, such as modern slavery (see our case study: “Taking a stance against modern
slavery in New Zealand” below for more detail). As part of this effort, we have launched the
Nikko AM Freedom Fund, which donates all the fees and returns to the charitable organisation,
Tearfund. Tearfund works through partnerships in some of the poorest parts of the world.
Together with these partners, it offers an end-to-end response to the issue of humantrafficking and slavery, tackling poverty and injustice through sustainable development.
Proxy voting is executed in the interests 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 appetiteand perspectives 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.

MSCI ESG Fund Ratings are designed to measure the environmental, social and governance (ESG) characteristics of a fund’s underlying holdings, making it possible to rank or screen
mutual funds and ETFs on a AAA to CCC ratings scale.

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Principle 7

Asset class

How we integrate ESG and stewardship responsibilities into the investment process

Asia Fixed Income

●

●

●

●

New Zealand Fixed
Income●●●Multi Asset

●

HOME

Our ESG Materiality Map is applied to the company using ESG factors based on the
Sustainability Accounting Standards Board and MSCI, but adapted to reflect conditions in Asia.
ESG analysis is incorporated into all company research and portfolio construction. ESG-focusedresearch is also used to identify areas for issuer engagement.
In 2022, we embarked on a project to improve how we assess sovereign bond issuers’ exposure to,and management of, ESG risk factors. To that end, we reviewed existing market practice, guidance,
and available data, involving a close collaboration between our Asian Fixed Income and Global
Sustainable Investment department. We have now developed a proprietary ESG sovereign rating
model using public data from sources such as the World Bank, the United Nations, and EDGAR (theEuropean Commission Emissions Database for Global Atmospheric Research).
We have selected 20 indicators that broadly cover all three areas of E, S, and G. These
include: greenhouse gas emissions (per capita and proportional to GDP), an index of humandevelopment and a measure of government effectiveness. Implemented in 2022, the newmodel has since been deployed as an ESG element in our sovereign credit model and has
already added substantially to the quality of our investment analysis.
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 integration is conducted from both a top-down and bottom-up perspective:– The bottom-up approach relies on our teams of ESG Specialists and research analysts,
whose processes form part of the fundamental research process.
– The top-down approach entails the use of norms-based screening methods to identify
companies that breach ESG safeguards such as the United Nations Global Compact (UNGC)
Principles, or OECD Guidelines.

●

Money Market●

For existing holdings, where a company is involved in controversy, or is identified to havebreached a social safeguard, further due diligence is conducted before concluding if theposition should be sold from the portfolio.
ESG and stewardship considerations are considered as part of the issuer selection process tothe extent that they are deemed material to the investment case and in line with our clients’risk appetites.

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Some examples of how we integrate ESG in our portfolios is shown in the case studies that follow:

Case study: ESG factors drive decision to sell major Japanese measuring instrument
maker (equity)
This company is a major manufacturer of analytical and measuring instruments. It provides advanced analyticaltechnology to industries that need to measure air, water and other environmental pollution. As the global market
leader in automotive engine emissions measurement equipment, its instruments were used to expose Volkswagen’s
emissions fraud. However, the Japanese Equity team’s concerns started to grow that the automotive measuring
equipment business would lose money in 2022 as car manufacturers increasingly shift to electric vehicles. There was aclear risk that the automotive measuring equipment business would shrink as a result of growing transition risk, i.e. as
economies move towards a low-carbon environment.
Issue: We have used our proprietary Creating Shared Value (CSV) evaluations based on the work of Harvard University
Professor Michael Porter as part of our Japanese Equity investment process since 2013 to determine whether astock is at a premium, neutral or at a discount relative to the sector. These evaluations incorporate 12 factors suchas diversity, management ability to execute, contribution to the environment and society, and threats to business
continuity together with an evaluation of financial strength and returns to shareholders grouped into three
categories: competitiveness, ESG, and financial strength.
Our sector analysts cut our proprietary Creating Shared Value score in September 2021 from 20 to 13 (out of a
possible 24), largely on the back of the risks facing automotive instrumentation.

ESG
Human Resources
Carbon Neutrality
Environmental & Social
Management
Implementation
Resilience

Marketcompetitiveness
Financial
Shareholder Returns
Financial Discipline

Entry Barriers
Brand Equity
R&D/CAPEX
Cost Advantage
Market Growth
Potential

This followed a decision by MSCI to reduce its ESG rating from A to BBB in August 2020, mainly due to the company’scontroversial sourcing and labour management policies. We continued to monitor the company through 2022,
although there were no further changes to the CSV score or MSCI ESG rating.
Outcome: It turned out that the semiconductor-related market was strong in 2022, with income from measuring
equipment for semiconductors boosting profits and more than offsetting automotive measuring equipment, which
remained in the red, as in the previous year. Despite the overall increase in profits, the share price valuation fell. Our
analyst believed that there was little room for any upward re-rating due to the climate-related risks in the businessand the automotive market. As a result of this evaluation and the fundamentals of the stock, our fund manager sold
all the shares during 2022.

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Principle 7

Framework for aligning Nikko AM Group funds to SFDR categories
There have been a significant number of regulatory
developments in the European Union in relation toenvironmental, social and governance issues, notably the
Sustainable Finance Disclosure Regulation (SFDR). Thishas coincided with rising investor demand for productsthat integrate material ESG factors from both a valuation
and wider environmental/social impact perspective.
To address both of these points, in 2022 we put
in place a global framework to allow products tobe elevated to a higher SFDR categorisation. The
framework consists of minimum ESG criteria that must
be integrated into the investment process in order for a
product to achieve a certain SFDR status. They include,for example, negative screens or exclusions, positive

screens (screening for companies that have enhanced
ESG characteristics) and portfolio-level targets, such as
lower greenhouse gas emissions.
All candidates for a change in SFDR categorisation haveto pass through an internal process, including their initial
adaptation by the investment team and ESG specialists
to include the requisite ESG characteristics, followed byinternal approvals, to ensure that the minimum criteria
have been met.
The framework got underway in late 2022 with two
funds moving through the process. Further products are
expected to pass through in 2023. This is a further exampleof how we look to integrate ESG across our portfolios.

Case study: Taking a stance against modern slavery in New ZealandIssue: Unfortunately, slavery in New Zealand, andglobally, is much more widespread than is generally
acknowledged or understood. In the light of this, in
April 2022, the New Zealand government launched aconsultation on planned legislation addressing slavery
and worker exploitation. As proposed, the legislation
would create due diligence and disclosure obligations
for a large number of companies operating in the
country, with additional responsibilities for larger
organizations. This will affect a big part of our portfolio
and investible universe.
Activity: Our New Zealand office decided to get aheadof the issue by engaging an ex-detective who is now
a consultant helping private and public companies
map their exposure risk to modern slavery, as wellas uncovering and addressing slavery and people
trafficking in their supply chains. He has provided
training and information to our analysts, equippingthem to better interrogate company managements
and boards about the issue and help them with ways
to deal with it. Typically, this involves looking closely at
contractors and sub-contractors.
Outcome: By working with companies, raisingawareness and facing into the problem rather thanignoring it, we hope to see more change, bothlegislatively and practically, at companies and their
supply chains, here and abroad. On the back of ourtraining and information sessions, we have sinceregularly discussed the modern slavery environment in
New Zealand with managements, especially those inriskier industries like agriculture and construction. These
insights are generally well received. In one instance, as adirect response of our engagement, a listed healthcare
provider has shared the information we provided tohelp inform their own teams of the scope of the modern
slavery risk assessment process.

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Principle 7

OutcomeFurther demonstrations of the practical outcomes of our integration of stewardship – and particularly ESG
considerations – into our investment activities is through some examples. We have therefore included
additional case studies in this section.

Case study: Moving an energy-intensive company in the right direction (fixed income)PT Indika Energy TBK7 is an Indonesian-based company
whose primary businesses are coal production,engineering, construction services and power
generation.
Issue: Indika’s substantial coal mining operations
mean that the company is likely to face increased
stranded asset risk as thermal coal demand declines anddecarbonisation initiatives gather pace, both regionallyand globally. The company is aware of the threat andhas publicly announced its sustainability strategy,committing itself to reaching net-zero carbon by 2050,
with an interim target in 2025. In achieving this aim, itplans to:●increase non-coal revenue streams to at least 50%;●

reduce its greenhouse gas footprint;●

divest coal-related and high-carbon assets; and●increase investments in non-coal and renewableenergy and nature-based business solutions.

Engagement: We believed it was important to engage
with the company to further understand its long-termtransition strategy and encourage its execution, which
would help to mitigate the risk from stranded assets.
Our engagements were primarily through one-to-one
meetings, group investor meetings and web calls.

●●

A joint venture with Foxconn, the Taiwaneseelectronic products group, to manufacture electriccommercial vehicles.
A business based on a forest area in East and Central
Kalimantan amounting to more than 160,000 hectaresfor:– making wood pellets for use in biomass energy
generation;– creating carbon offsets that are available for thegroup or for sale; and– manufacturing high-value agro-forestry products.

●●

A joint venture to develop a solar photovoltaic panels
business; andA joint venture to build electric motorcycles, with anaspiration to become a leading brand and create thenecessary charging and other infrastructure, which iscurrently minimal in Indonesia.

We estimate that over 50% of the company’s
investments and capex will be directed towards noncoal segments, with a strong focus on green businesses.

Multiple contacts with the company’s senior
management and investor relations team were madethrough the course of 2022. These sought to both clarify
with management the company’s sustainable businessstrategy and track the progress of its implementation.

In addition, Indika has announced the disposal ofcertain coal-related assets, selling both its holding in
PT Petrosea, a mining engineering business, and in PT
Mitrabahtera Segara Sejati, a coal shipping company.
ESG-related initiatives have also included expanding
greenhouse gas reporting to cover the more extensive
Scope 2 and Scope 3 emissions and developing aroadmap for the company’s journey towards reachingnet-zero carbon.

Outcome: Indika has been actively executing its
business strategy during 2022. Alongside commitments
to invest in renewable and nature-based businesses,
the company also undertook several tangible initiatives
to build its low-carbon business streams. These haveincluded establishing:

Our assessment is that Indika has been taking very
concrete steps to move away from its coal business andview the company’s ESG profile as improving. We willcontinue to engage with Indika and monitor its progressin delivering its strategy in accordance with its interim
and long-term targets.

Reference to individual stocks is for illustration purpose only and does not guarantee their continued inclusion in any portfolio, nor constitute a recommendation to buy or sell.

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Case study: Improving ESG disclosures at a large Singaporean agribusiness (equity)
cultivation, processing and distribution of agriproducts, ranging fromfood to industrial chemicals, such as oleochemicals and biodiesels.

We aim to identify companies where ESG factors are improving, as
there is then scope for an uplift in valuation once the improvements
become evident to the market. An example is the history of ourinvestment 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 of material ESG issues, including carbon emissions, landconservation and labour practices. The diagram below illustrates theinvestment team’s ESG Materiality Map for the company.

Wilmar International8 is an integrated agribusiness encompassing theentire value chain of agricultural commodities. Its operations span

ESG Materiality Map
Environmental Pillar (50%)
ClimateChangeEmissions& Energy
Management

NatureCapitalPollution& WasteManagement

Water

Product
EmissionsLand
Footprint
Financing
Envionmental Biodiversity
ImpactClimateResource
ChangeManagement
Vulnerability
Primary Risks

Social Pillar (30%)

Environmental
Opportunities

Human
CapitalProduct
Liability

Toxic
Emissions &Waste

Clean Tech

LabourManagement&
Development

Product
Safety &Quality

Packaging
Material &
Waste

Green
Building

Equal
Opportunities

Customer
WelfareElectronic
Waste

Renewables

Health &SafetyPrivacy & Data
Security

Opportunities
in Health &Wellbeing

Board

AntiCompetitive
Practices

Supply Chain
Management

Responsible
Investment

Community
Development

Pay

Corruption &Instability

Accounting
Practices

Past
Transactions

Issues which can put a company out of business

Financial
SystemInstability

SocialOpportunities

Governance Pillar (20%)
Corporate
GovernanceCorporate
Behaviour

Governance
Opportunities

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

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

Minority
interest
Alignment
PrincipalAgency
Alignment

Issues which can lead to a material enhancement in shareholder returns

Engagement: We have been engaging with the company directly
since 2018 and also previously as a member of the investor working
group on sustainable palm oil set up by the UN-backed Principles for
Responsible Investment (this collaboration has now concluded). In theintervening 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 (astakeholder 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 improvement in thecompany’s attempts to improve food safety and nutrition practices,which we had previously highlighted as an area where there was anopportunity to improve sustainability.
Through 2022, we have continued to engage with Wilmar to better
understand the company’s ESG disclosures, while tracking developmentsin the three ESG areas and push it to improve the information it provides.
Further developments noted through 2022 were in three main areas:
1. Environment: The company agreed to provide more data about its
emissions ahead of its goal to become carbon neutral by 2030. It has

committed itself to providing more definitive ESG data and targets
in its 2023 Sustainability Report. The company has also agreed to
put more effort into reducing methane emissions and improving
methane disclosures.
2. Social: The company continued to play an important role in ensuring
food security during Covid lockdowns last year in China. In anothercontext, it has invested in areas like education and housing forIndonesian farmers struggling with the difficulties they faced over Covid.
More details will be announced in the forthcoming Sustainability Report.
We encouraged Wilmar to be more public in highlighting its social
contribution, given its big role as a supplier of consumer goods
in China and the under-appreciation of Wilmar’s contribution inrecent years towards the betterment of the farming community.
3. Governance: The company continues to maintain a good standardof governance and respect for minority shareholders, while the annual
accounts are more transparent.
We believe Wilmar has made progress with its ESG development
during the year and has been receptive to our feedback in our
engagements with the company.

Reference to individual stocks is for illustration purpose only and does not guarantee their continued inclusion in any portfolio, nor constitute a recommendation to buy or sell.

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Principle 8
Signatories monitor and hold to account service providers.

Activity
A number of outside service providers help us in the
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 understandingof how they engage with companies and to enhance
the quality of the research we receive. The quality anddepth of reports and insights are considered, as well as
the effectiveness of the vendor in providing us with thenecessary insights to fulfil our stewardship obligations onbehalf of our clients.
Although there is value in the data provided by our thirdparty providers, we mostly treat it as supplemental to ourown analyses, particularly for our active strategies, and believe
any enhancement depends on how the information isincorporated into the investment process. A large portion of
our AUM are in Japanese and Asia Ex-Japan equities, as well as
fixed income assets where coverage by third-party providers
is still evolving. We find that there are data gaps and delays
while, at times, we disagree with the analyses or ratings evenwhen they are available. We therefore do not rely exclusively

on these services. Additionally, we conduct all engagementwith investee companies ourselves and the decisions on how
we vote proxies are ultimately made internally.
When engaging with any external service provider, weundertake an initial due diligence analysis, after which
the provider is subject to ongoing monitoring and due
diligence. Each department that owns the relationshipwith the applicable external service provider undertakes anannual review of the cost, effectiveness and usage of theservices received. Vendors are also subject to anti-moneylaundering 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.
During 2022, we have expanded the template used forthe due diligence questionnaire in the UK subsidiary, withadditional questions on ESG and modern slavery. The levelof scrutiny depends on the type of vendor and follows a riskbased approach.

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)

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Principle 8

An example of a service provider we use extensively for our
stewardship activities is ISS with whom we share our proxyvoting policies and who we use to carry out proxy voting
on our behalf. For the majority of resolutions, upon receiptof advisory research and voting recommendations from
ISS, the portfolio manager or analyst responsible for the
security in question looks at the report and conducts further
research where any issues have been flagged.

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 its
guidelines do not match our expectations. Our interaction
with ISS and our voting process is further detailed in our
response to Principle 12.

Case study: Voting against management and a service provider’s recommendation (equity)
This relates to a packaged foods company held in one of
our equity strategies.

either the company’s performance or the independent
oversight of management on the part of the board.

Issue: In September 2022 a shareholder resolution
was proposed at the annual meeting of shareholders
to request that the company adopt a policy that thechairman be an independent director. In this instance
ISS recommended a vote against this proposal for anumber of reasons – the company had establishedgovernance guidelines and there were no concerns
regarding board or committee independence, or thecompany’s governance practices at that time. Also, thecompany had outperformed peers in its sector on both ashort – and long-term basis under the current leadership
structure and so there were no concerns regarding

Activity and outcome: We voted in favour of theshareholder proposal for an independent chairman andagainst ISS’s recommendation on this occasion. Our basis
for the decision was that we believed (in line with our
proxy voting policy) that separating the roles of CEO andchairman is best industry practice and helps to ensurethat company decisions are made in the best interestsof shareholders. The resolution failed to pass with anapproval rating of 41.75%. We will continue to vote in asimilar vein in order to use our influence as shareholders
to encourage best practice.

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Principle 8

Monitoring our main ESG data vendor
Since the creation of our new, global, ESG data team inearly 2022 (see Principle 7 for more on this), we havefocused on improving both the availability and quality of
ESG data being used by investment teams. Our primary
focus has been to ensure that our data are accurate,
timely and consistent across all investments coveredby us. As we rely on a large data vendor for a significant
portion of our data, we have engaged with it on aregular basis to improve the accuracy and usability of thedata. Since April 2022, we have raised 31 issues with it toaddress underlying issues. The types of issues raised havefallen into two categories: 17 have related to generalqueries regarding overall data sets and 14 have been
related to specific data quality issues.
In the general category, we raised issues regarding theconsistency of data used in common calculations (suchas weighted average carbon intensity). For instance, we
noticed that the sales figures and carbon figures could
be for different years for some securities, whilst for others
they were the same. To address this, we had multiple
discussions with our vendor to persuade it to provide
consistent data which would allow proper comparability
for both investments and potential investments. The
process took over two months, but we were able toimprove the quality of our analysis as a result.
On specific data, we have found that some of thenumbers supplied can be incorrect. In one case wefound that the gender pay gap ratio for a company wasreported at a high level for a specific holding, whereas

we believed the organisation did not disclose this pieceof information. After some discussion, our data vendor
agreed that it had incorrectly reported the figure andsubsequently corrected the field.
Many of these discussions have resulted in inadequate
responses. We have therefore escalated the issue with
our vendor and agreed that from early 2023 we will be
conducting a monthly call to ensure that the data we
receive continue to improve and adequately support ourinvestment decision-making and understanding of ESG
issues. We have also taken additional steps that should
improve the quality of our data:●●●

We have put in place an override option that allows
us to by-pass any data points we feel are inaccurate.
The evaluation process will sit with the ESG data team,which is independent of the investment teams, toensure that we are using publicly-reported data thatare timely and accurate.
We are conducting a large-scale data vendor
assessment process to improve our understanding of
the data market. We have thus far engaged with 17
ESG data vendors to assess them on coverage, quality
and organisational commitments to sustainable goals.
This is an ongoing process, but we hope it will result inensuring we have access to the best data available for
integration into all of our ESG-related decisions.
We are continuing to review and enhance our vendor
due diligence oversight process, including in areas
such as ESG and sustainability.

Outcome
The expectations of regulators and our clients grow all thetime, for example, in complying with the requirements of
the Sustainable Finance Disclosure Regulation or the Task
Force on Climate-Related Financial Disclosures, as well as
more detailed reporting of proxy voting. This in turn raises
our expectations of the service providers we use to provide
the data that ensures we can meet these requirements.
Although we have made significant progress during2022 in our ability to collate and process ESG data, weare far from content with the depth and quality of someof the information we are processing. In some instances,
we have found that the information published is dated
or inaccurate; in others, coverage is so poor as to makereporting effectively meaningless and, in yet others, themethodologies and assumptions used to draw conclusions
are not clearly defined.

In such instances where data fail to meet our minimum
standards, we feed our concerns back to the relevant service
provider as part of our day-to-day operations, although thisdoes not always result in records being updated at source.
As mentioned in the Activity section, we are working hard togain a better understanding of the data market in order toensure that we are sourcing the most appropriate data to fulfil
both our regulatory and our client obligations. In the meantime,
we continue to use our knowledge of the companies inwhich we invest to correct erroneous data to ensure that ourinvestment theses and reports are as up to date as possible.

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Principle 9Signatories 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 and parcel of our fiduciary duty.
Active engagement with our companies is built into ourinvestment processes and plays an integral role in fulfilling
our commitments as a good steward of the capital that ourclients have entrusted us with. Our strategy as outlined here
should be read in conjunction with our Global Engagement
Strategy, Commitment to Responsible Investing and theGroup Proxy Voting Policy.

built up over many years. Furthermore, as displayed in thepie charts under Principle 6, since a significant portion of
our Japanese equity AUM is held in passive portfolios, thislimits our influence since we do not have the same ability
to divest these assets, however our Japan Sustainable
Investment department is actively working to influence
positive change at target companies on core ESG themes
even where they are held only in passive portfolios. This is amulti-year project.

While the general approach outlined here applies to all
discretionary accounts, it will be adapted to circumstances.
For example, Japanese culture may approach engagementfrom a different perspective than Western societies, since
public engagement to influence change is viewed as
discordant and can have negative impacts on relationships

The map below gives the proportion of the firm’s total ESG
engagements9 undertaken across our different regions.
We compare this to the relevant proportion of total AUM
in different client domiciles. The charts that follow provide
a further breakdown of ESG engagement by theme andinvestment team respectively.

ESG engagement compared to AUM by client domicile

EMEA
6.0% of Engagement
2.5% of AUM by Client Domicile

ASIA EX-JAPAN
23.2% of Engagement
3.8% of AUM by Client Domicile

JAPAN
66.5% ofEngagement
90.9% of AUM by
Client Domicile

AUSTRALIA & NEW ZEALAND
4.3% of Engagement
2.5% of AUM by Client Domicile

The total number of engagements (as at 31 December 2022) is greater than those reflected here. For example, the Japan Sustainable Investment
department in 2022, working with the Equity Fund Management department, met 1,116 firms a total of 3,404 times.

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Principle 9

ESG engagement by theme

ESG engagement by investment team
NZ Fixed Income 1% Global Fixed Income 1%
NZ Equity 3%
Asia ex-Japan Fixed Income 7%
Global Equity 5%
Environment
37%

Governance
39%

Asia ex-Japan Equity
17%

Japanese
Equity66%

Social24%

Engagement objectives

Engagement methods and execution

We engage with our investee companies on their strategy,
operations and financial decisions, as well as theirperformance and management with respect to material
environmental, social and governance issues. The purposeof our engagements is to help them attain and sustain highreturns and create value, while becoming and remaining
good corporate citizens. In carrying out our purpose, we
seek to understand managements’ stance and strategy onmaterial issues, monitor their performance on these issues
and set milestones, where appropriate, and shape corporate
behaviour and influence positive change by encouraging
policies such as enhanced ESG disclosure and performancein line with best ESG practice.

Our engagement methods vary, based on the needs of thesituation. These methods include:

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

Materiality: our engagements are driven by material
factors, including ESG factors;
Intentionality: we establish clear objectives andexpectations for our engagements;
Effectiveness: we engage in a constructive, positive andpragmatic manner.

●
●
●
●

one-to-one company dialogues, including on-site visits,management calls and roadshows,written communications,collaborative engagements.

In some parts of Asia, one-to-one engagements are often
the most constructive and culturally appropriate way tobuild trust, on the basis that confidentiality can bring better
results than open confrontation. Mindful of these importantregional nuances and our commitment to constructive,
positive and pragmatic engagements, we carefully selectour engagement methods, whilst being committed tosupporting 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, chief executives, chief financial officers, andexecutive directors, where appropriate, as well as others
whose duties include sustainability and investor relations. If
these more consensual approaches fail to achieve our desiredends, or there are more serious failings by a company, we
may escalate the matter. This could involve collaboration
with other investors. These approaches are discussed in moredetail under Principles 11 and 10 respectively.
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 andduring the period of investment. Our regional ESG specialists
are also beginning to perform more thematic engagements(for example, in relation to our responsibilities under the
Net Zero Asset Managers initiative and Climate Action100+), however the analysts and portfolio managers in ourinvestment teams are ultimately responsible for assessing the
ESG risks and opportunities that inform portfolio buy and selldecisions and engaging with the companies they cover.

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Principle 9

Several key issues decide how we prioritise companies forengagement, which can differ by region and asset class. The
factors that may be considered for prioritisation 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,
our investment decisions. Our principal objective, however,is to seek commitments from company managementsthat they will address any material concerns raised byinvestment and Global Sustainable Investment department
as a result of our engagement.

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 Equity
Our Japanese equity investment teams have a deep
understanding of local markets and the intricacies ofJapanese corporate culture, which helps us develop
relationships with the companies in which we invest.
Sources of information extend beyond written forms, suchas 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 we are one of the largest asset
managers in Japan and where the market generally tends tobe under-researched by non-domestic peers, helps facilitate
dialogue with companies. Over the years, we have beenable to establish strong local relationships, providing us withunique insights, investment opportunities that might haveotherwise been overlooked and the ability to undertake
unusually far-reaching stewardship.
Since August 2021, a key focus of the Japan Sustainable
Investment department has been to work with portfolio
managers and analysts in our research teams to engage
with large and mid-sized firms specifically on ESG issues.
The priorities when deciding which firms to engage withare based on several stewardship considerations, including,amongst other things, ESG (on which see more below),
corporate earnings, asset efficiency and shareholder return.
After each engagement, a report is created to track progress
and is shared internally. Feedback is also provided to active
investment portfolio managers. Some illustrations of how
we engage with our Japanese portfolio companies can befound in our case studies below.

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Principle 9

In March 2021, the Japan Sustainable Investment
department established three ESG priorities (published on
our website as Nikko AM’s Key ESG Themes) for engagementwith our Japanese equity investments, which we believe willcontribute to better investment returns in the medium – tolong-term. They are listed below with the background toeach one:
Environment – Action for a decarbonised
society: The shift toward a decarbonised society iscreating growth opportunities for companies withenvironmentally-friendly technologies. At the sametime, decarbonisation and other such changes put
companies at risk of potential cost rises, while theirbrand power may be damaged if they fail to takesufficient action. This is making decarbonisation
increasingly important as a driving force behind
future corporate value. We use our engagement tourge firms to address these changes, for example
by allocating business resources to related fields
and preparing for the associated risks. Our analysesof companies’ actions in this area are pivotal to ourassessments of their corporate value.
Social – Human capital and productivity:
The way companies use human capital is clearly
important for their medium – 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 needfor flexible responses to similar environmental
changes have also driven improvements in corporate
sustainability. Deepening our engagement andanalyses with companies, with a focus on personnel
strategies and systems, as well as labour productivity,
is another way in which we are helping to enhance
corporate value.
Governance – Effective governance: Thanks inpart to the Corporate Governance Code, Japanesecompanies have made great strides in developing
their governance frameworks. We continue tourge companies to increase their corporate valueeven further through sustained development andenhancement of their governance frameworks. Our
engagement covers the appropriateness of their longterm vision and management strategies, their ability to
put these plans into practice, and the effectiveness of
their oversight and advisory functions.

In 2022, the Japan Sustainable Investment department
established an engagement platform for information
sharing to enable the wider Equity Fund Management
department to carry out engagement in a systematic andeffective manner. The department identified over 100
companies that could enhance their value by resolving
certain material issues. To ensure that action follows thisanalysis, we are setting up a milestone management
system to monitor progress towards the resolution ofthese issues. The aim is to form a common purpose within
the department, while encouraging and co-ordinating
collaboration between fund managers and sector analysts.

Global Equity
When appropriate, our Global Equity team engages withinvestee companies to help us understand how their ESG
opportunities and risks are being managed. These meetings
can occur at any point in the investment process – frominitial research, through to portfolio inclusion and beyond.
These discussions provide us with an opportunity todevelop our knowledge of each business and industry, andto take a view on the quality of management teams andtheir strategies, including on ESG issues. We also engage topromote better ESG practices if we believe there is room
for standards to improve, for example by encouraging
enhanced ESG disclosure and performance in line with best
ESG practice. More on how we engage with our investee
companies can be found in our case studies below.

Global Fixed Income
In our Global Fixed Income portfolios, most of our AUM
are in sovereign or other AAA bonds and money market
instruments. We also hold small shares of issuance bymajor banks and some leading corporates. We maintainan active dialogue with issuers and see this as a meansof building our insight and market intelligence. We have
had a number of engagements during 2022 with financeministries and municipalities in relation to their green bondissuance programmes. For example, we spoke to a numberof Canadian and New Zealand issuers about the growing
importance of biodiversity to the wider market as well as
our own clients. We also spoke of the growing importanceof the “S” in ESG and the concept of a just transition to azero-carbon society. We will continue this dialogue. .
We recognise our position as a “gateway investor” forJapanese investors in the Danish mortgage bond market. We
therefore believe it is important to regularly engage with theDanish mortgage banks in respect of their lending practices,
securitisation methods and issuer programmes. See Principle 6
for a case study on our engagements in this area during 2022.

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Principle 9With respect to corporate credit, our Global Fixed Income
portfolio managers and research analysts engage with thecompanies in which we invest. These discussions cover
the firms’ corporate earnings and financial strategies, aswell as other non-financial information, including their
management policies, business strategies and material ESG
matters, as part of an assessment of corporate value that
ultimately informs our investment decisions.
Where we have identified company-specific or systemicrisks, we may raise these concerns through meetings,

site visits, conference calls or correspondence in order togain assurance that risks are being managed. We prioritise
engagements based on our holding, the bond issue inquestion and our exposure. The level of engagement
depends on the asset class and the geographic region.
Given our relatively small exposure to corporate bonds andemerging markets, 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. We illustrate how we engage with bondissuers in our case studies below.

OutcomeThe best way to describe our engagements in the past 12 months and their outcomes is by a series of examples and case studies.

Case study: Decarbonising executive compensation at a Japanese oil group (equity)
This company is a major Japanese oil wholesaler held in
our Japanese equity portfolios.
Issue: Given the carbon intensity of its business,the company urgently needed a strategy to address
climate change.
Engagement: In April 2022, we met one of thecompany’s executives and exchanged views on thecompany’s efforts to decarbonise its businesses.
Our focus was executive compensation, where wepointed out that financial incentives should include
an assessment of progress in meeting the needs ofa decarbonised society, which the company had
highlighted was a priority management issue. Currently,
executive compensation is performance-linked, mainly
based on achieving operating income and net incometargets in a single year. These are, in turn, mainly
dependent on previous investment in fossil fuels and on
current commodity prices.
The director responded that the executive
compensation system was a key area for review in a new
medium-term management plan to be announced in
the autumn. He added that our views were helpful as
the company debated how to improve its approach to
executive compensation.
Outcome: In November, the company announced its
new medium-term management plan, which included
a new target of cutting revenue from the fossil fuelbusiness to below 50% by 2030. It also announced thatits greenhouse gas reduction target would be linked to
executive compensation.

Case study: Improving independent oversight at an insurance company (equity)
This is a major Japanese insurance company held in ourJapanese Equity portfolios.
Issue: We opened a conversation with the company
after a change in our policies on outside directors andauditors to improve independent company oversight.
These changes were part of a revision of our criteria
for exercising voting rights made in February 2022 toinclude new guidelines on the maximum tenure ofoutside directors and auditors. This stated that we nolonger considered outside directors to be independent
once they have been in office for more than 12 years andthat we would then vote against their re-election.

Activity: We started discussions with the company inJanuary 2022, informing it of the forthcoming changes
to our criteria and the rationale. We asked that it publish
its policy on the maximum tenure of both outside
directors and outside auditors. The company promised
to consider our representations.
Outcome: The company has since revised its basic
governance policy. It has established a new policy that,in principle, the maximum tenure of outside directors
should be 10 years and the maximum tenure of outside
auditors should be 3 terms or 12 years. This change
satisfies our new criteria for exercising voting rights infavour of boards.

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Case study: Successfully pushing a chemical company to be greener and more diverse (equity)
This is a Japanese chemical company we hold in ourJapanese Equity portfolios.

raised the issue of the absence of female directors andmade clear our expectation that this would be rectified.

Issue: A major restructuring offered us the opportunity
to revisit the company’s strategy on growth,decarbonisation and board diversity.

Outcome: In 2022, the company announced a new
2030 target to reduce greenhouse gas emissions to lessthan 50% of their 2013 level. It also said that it planned
to move to a business structure centred on specialty
chemicals, which have a lower energy burden and areless susceptible to market conditions than the existing
businesses. On the question of diversity, a woman was
successfully elected to fill a place for an outside director
at the company’s 2022 annual general meetingof shareholders.

Engagement: The company announced in 2021 that
it was planning to deconsolidate its cement businessthrough a joint venture with another company. The
reorganisation prompted us to seek information on how
the company’s growth strategy would change as a result,and on any new decarbonisation strategy and targets atthe cement business.
We met the president of the company and requested
the disclosure of the cement business decarbonisation
strategy, decarbonisation targets and the company’s
new business strategy in the wake of the establishmentof the cement business joint venture. In addition, we

We appreciate the progress the company is making andbelieve pressure from our engagement helped push itin the right direction. Nonetheless, we will continue toengage the company on all ESG fronts to ensure thatforward momentum is maintained.

Case study: Controversial sourcing policies at an IT company (equity)
Hexagon10 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 torival companies on account of its sourcing policies andthe lack of traceability of its raw materials.
Engagement: We discussed the issue in early 2021
with the Head of Investor Relations and Sustainability.
Since then, the company has published its first annual
sustainability report. This states that appropriate sourcing
policies are now in place, with close to 50% of suppliers
being covered by a new audit scheme introduced in2020. Its Conflict Minerals Policy commits it to identifying
products that may include minerals from countries where
there is fighting – so-called “conflict minerals” – andextends its policy to suppliers, where possible. It is also
enjoined to take reasonable efforts to avoid the use of
raw materials that directly or indirectly finance armed
groups which violate human rights. Amongst otherthings, Hexagon is also implementing a sustainability
programme, a supplier qualification process andencouraging suppliers to adopt guidance from the OECDon responsible supply chains.

Following the company’s response to our engagement,
we left our investment recommendation unchanged,with no change to our Future Quality thesis. We said,
however, that we would continue to engage withmanagement on procurement as part of our regularinteraction with portfolio companies. We particularly
wanted to focus on the degree of progress by thecompany in auditing suppliers.
Outcome: Hexagon has since shown steady
improvement. In August 2021, MSCI upgraded its“controversial sourcing” score for the company to close
to the industry average. MSCI also gave it a top score
on its commitment to avoiding controversial materials.
In May 2022, we followed up on our initial engagementwith a number of questions to gauge progress. We
were pleased to see that, despite Covid restrictions,
Hexagon had carried out 24% of planned supplieraudits and was on track to meet its target of 100%of direct suppliers audited by the end of 2023. Basedon the numbers to date, Hexagon has seen the levelof non-compliance per supplier remain stable, while
controversial sourcing has ceased to be a key issue in amore recent report from MSCI.

Reference to individual stocks is for illustration purpose only and does not guarantee their continued inclusion in any portfolio, nor constitute a recommendation to buy or sell.

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Case study: Following-up on our efforts to improve environmental commitments at a US
building products group (equity)
Carlisle Companies11 is a US building products groupheld in our Global Equity portfolios.
Issue: Carlisle has been divesting non-core segmentsof its business and allocating capital to higherreturn products that aim to help meet customers’
environmental and energy requirements. As part of thisstrategy, it sold its Carlisle Brake & Friction brakes divisionand bought Henry, a rival building products company.
We believe this new direction for the group should
benefit all stakeholders and lead to strong shareprice appreciation in time. It also makes sense froman ESG perspective, as buildings account for about
28% of greenhouse gas emissions globally andCarlisle’s products help reduce heat and energy loss.
Management has started to improve its ESG andsustainability communications, notably in its recentlypublished sustainability report.
Engagement: We engaged with management towards
the end of 2021 and highlighted a number of ESG
improvements the company could make. Given its
strengths in staff relations and climate-related products,
we believed these steps would improve the perceptionof the company. Specifically, our recommendations
were:
●

●

●

sign up to the UN Global Compact;
disclose the gender pay gap as it already does for thegender make-up of the board;sign up to the Science Based Targets initiative, acollaboration between CDP (formerly the Carbon
Disclosure Project), the United Nations Global

Compact, the World Resources Institute and the World
Wide Fund for Nature, once it can measure its Scope 3
emissions (those from suppliers and the like).
We followed up this engagement in June 2022 when
we met the Head of Investor Relations and the Vice
President of Sustainability. It was evident that Carlisle
had progressed on its ESG journey – the company had
committed itself to adopting Science Based Targets,with a 2030 goal of reducing Scope 1 and 2 emissions(those produced directly and indirectly by the company)
by 70% and an ambition to set further targets for 2050,
including those that fall under Scope 3.
We reiterated our previous recommendations anddiscussed disclosure requirements from European
investors in relation to the EU’s Sustainable Finance
Disclosure Regulation. The Vice President of Sustainability
responded that our requests would be explored further.
Outcome: Despite the progress, it remains clear thatfurther developments are needed for the company toreach net zero. Carlisle is partnering with universities andtechnology leaders to develop what will be required.
Creating bio-based products, likely involving carbon
sequestration, is a possibility, while it is also discussing
how its products could be recycled or reused once they
are no longer needed, so-called “end-of-life circularity”.
We remain long-term investors and will continue toput pressure on the company to adopt best practiceduring 2023 and beyond. However, bearing in mind
our position as relatively small shareholders, we are
cognisant of the limitations of our influence.

Reference to individual stocks is for illustration purpose only and does not guarantee their continued inclusion in any portfolio, nor constitute a recommendation to buy or sell.

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Case study: Keeping the heat on an Indian steel maker to be more green (fixed income)In our Asia Fixed Income portfolios, we hold bonds
issued by JSW Steel, an Indian-based integrated steel
manufacturing company that ranks among the largest
steel producers in the country.
Issue: The company’s production processes involve highenergy consumption and large emissions of greenhousegases and waste products. We wanted to understandthe company’s decarbonisation strategy and track its
execution and progress.
Engagement: We have engaged with the company several
times during the year, both via ad hoc calls or through moreformal meetings. During these discussions, the company
has identified 17 priority ESG areas to be addressed and has
set some specific sustainability targets, including:●●●to reduce Scope 1 (direct) and Scope 2 (indirect)
CO2 emissions by 42% from 2005 levels by 2030;
to reduce energy consumption by 19% from 2005 levels
by 2030;
to achieve carbon neutrality at JSW Steel Coated
Products by 2030.

Outcome: The company is clearly trying to make progress,
although there is still a way to go yet. For instance,
greenhouse gas emissions and energy consumption
showed a small uptick in 2022 after new plant wascommissioned at its Dolvi works on India’s west coast.
However, both have been brought down again this year
through a combination of measures, including an increasein green energy consumption.
This is evidence of the seriousness of the company’scommitment to systematically increase the share of

renewable power used in production. It has entered into
solar and wind power purchase agreements through its JSW
Energy offshoot. The plan is to ultimately develop renewable
power capacity of 958 MW, of which 225 MW of solar power
was commissioned in April 2022. The balance will come on
stream in phases. The company has not yet specified a target
for renewable power, but India as a country is set to meet
50% of its energy needs from renewable sources by 2030.
JSW Steel has also committed itself to using more steel
scrap as it shifts from carbon-intensive blast furnaces topotentially “greener” electric arc furnaces (EAF), and touse more low – and medium-grade iron ore. As part of its
steel scrap commitment, the company has entered into
a 50-50 joint venture with National Steel Holdings, a New
Zealand metal recycling group, to set up scrap shredding
plants using industry-leading machinery. Its plans should
be boosted by the Indian government’s vehicle scrappage
policy, which aims to phase out polluting vehicles over time.
This should help the development of an “ecosystem” of steel
scrap collection and recycling, for which JSW’s environmentfriendly EAF-based steel production should be well placed.
On the debit side, while the company discloses data on
Scope 3 emissions (from suppliers and the like), it has
no specific targets for reductions, nor has it establisheda firm-wide net-zero target and roadmap. And while thecompany’s MSCI ESG Rating was upgraded from CCC to B in
December 2021, it admits that it remains on the low end of
the rating band. It has been making efforts to improve thescore, including appointing an independent auditor andincreasing the number of female board members. We willcontinue in our engagements to press the case for further
action on ESG priorities.

Case study: Probing the green commitment of one of Asia’s biggest banks (fixed income)
DBS Bank12 is Singapore’s leading multinational banking andfinancial services corporation and one of the largest banks in
Asia. We hold its bonds in our Asia Fixed Income portfolios.
Issue: As a leading Asian financial services provider, thebank services a wide clientele. As a result, any commitment
to ESG will have an extensive influence on society in Asia.
We also expect it to provide an example to other banks.
Engagement: We have been directly engaging with thebank over the years, both on an individual basis and as partof a group of investors. In 2022, DBS released its targets
for sector-specific decarbonisation to achieve overall net
zero by 2050. Targeted sectors include power, oil and gas,
automotive, aviation, shipping, steel, and real estate. We

have highlighted our concerns about the bank’s ability toreach its targets and sought a deeper understanding of
the rationale and thinking behind them so that we could
have a better appreciation of its commitment.
Outcome: During a meeting in 2022, DBS addressed
our concerns. It said its favoured approach was to standalongside clients in their shift to net zero rather thansimply avoiding clients where there were ESG concerns.
In such cases, it argued, there would always be someone
else ready to fill the gap and so there was unlikely to be
any positive change. This gave us confidence that DBS has
a long-term commitment to sustainability and that we can
expect further steps to be taken.

Reference to individual stocks is for illustration purpose only and does not guarantee their continued inclusion in any portfolio, nor constitute a recommendation to buy or sell.

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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-to-one
company engagements deliver insufficient progress,
collaborative initiatives with like-minded investors canincrease 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-to-one engagements can be viewed
as more constructive and culturally appropriate to build
trust. In Japan (which accounts for the majority of ourequity assets under management) we are mindful about
how we are involved in collaborative engagements due tolocal regulations concerning joint and large shareholdings,
whereby severe sanctions may be imposed if reporting
requirements have not been met. We therefore participate
in such engagements only after taking into carefulconsideration any potential ramifications.
Our involvement in collaborative engagements, often
working with other stakeholders such as industry partners
and academics, allows us to deepen our understanding ofparticular 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-specificportfolio managers and analysts. However, in some regions
we are exploring ways in which we could engage in a
way that covers both equity and fixed income holdings if
the need arose, for instance, where we have holdings ofdifferent asset classes in the same company.
Our regional investment offices select the mostsuitable and effective methods for their collaborative
engagement. Generally speaking however, we use thefollowing criteria to determine whether to join 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 other participantsin the initiative;
whether the cost, time and effort involved iscommensurate with the anticipated effect; andwhether the organisation sponsoring the initiative is one
with which we want to be associated.

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OutcomeIn 2022, we participated in multiple collaborative
engagements (across initiatives such as CA100+and AIGCC),
as shown in the example case studies below. However,despite our best intentions, it has not always been possible
for us to join collaborative engagements. For example,
during 2022 we made enquiries about participating incollaborative engagements for two companies held within
our Global Equity strategy. We were advised by the regional

co-ordinators of the initiative in question that they either
already had sufficient participation in engagements orwere only accepting applications from “large shareholders”.
Our requests for each of the two companies therefore did
not meet qualifying criteria for participation and so our teamproceeded to contact them independently to ascertain
information on their climate ambitions.

Case study: Sparking awareness of ESG at Indonesia’s biggest power company (fixed income)In 2022, Nikko AM Group joined the Asian Utilities
Engagement Programme (AUEP) of the Asia Investment
Group on Climate Change (AIGCC), an industry body trying
to raise awareness among investors about global warming.
An example of our collaboration with the AIGCC under thisengagement programme concerned Perusahaan Listrik
Negara13 (PLN), the only vertically-integrated electricity
utility in Indonesia, whose bonds we own in our Asia
Fixed Income portfolios. The state-owned company is thedominant power generation, transmission and distribution
provider in the country, accounting for more than 70% ofelectricity power production. PLN is also the sole buyer forIndonesia’s independent power producers.
Issue: With a total installed capacity of around 45.9GW,
close to 90% of PLN’s production is powered by thermal
sources, exposing PLN to high risk in the transition tozero carbon. Not surprisingly, the company scores poorly
among APAC utilities for both absolute and relative carbon
emissions. In addition, PLN’s governance continues to lag
global peers. The Indonesian government appoints half thedirectors of the board, severely limiting its independence.
In the light of these environmental and governance issues,
the AUEP is aiming to engage with the board and senior
management to secure several commitments:
1. To strengthen the governance framework to ensure theboard’s accountability and oversight for climate changerisks and opportunities. Specifically, to clarify the roleand responsibility of the Sustainability Committee in theimplementation of PLN’s decarbonisation strategies.
2. To draft action plans to reduce greenhouse gas emissions
in line with the Paris Agreement of the UN’s 2015
Climate Change Conference. This covers decarbonisation
strategies, requiring a timetable to phase out coal-based
emissions in less-developed economies at the latest by
2040, with similar commitments for natural gas.
3. To provide enhanced corporate disclosure in line withthe final recommendations of the Task Force on ClimateRelated Financial Disclosures (TCFD).

4. To outline the physical risks the company faces fromclimate change and what strategies it is adopting to
mitigate these risks.
5. To engage with public policy makers and otherstakeholders to support cost-effective policy measures
to mitigate climate-related risks and facilitate low
carbon investments in line with achieving net zero
emissions by 2050 or sooner.
Activity: In September 2022, we participated in our
first collaborative engagement call together with othermembers of the AIGCC who are engaging PLN as partof the AUEP. The call was held with PLN’s climate change
team. The team presented five possible routes that thecompany’s decarbonisation pathways might follow. Basedon the accelerated scenario, it outlined in more detail thecompany’s roadmap to net zero by 2060, which would see
its emissions peak in 2030, in line with Indonesia’s nationaltarget. As part of these plans, the company has committed
itself to building no new coal-, oil-, or unabated gasbased power plants after 2030, making hydropower thedominant energy source in its renewables mix.
From PLN’s perspective, four key issues need to be
unlocked for the company to accelerate its net zero
emissions target. These are:●ensuring supportive electricity pricing;●●●

maintaining favourable finance channels;
deploying new technologies, such as carbon capture,utilisation and storage, and hydrogen power, in large
scale in Indonesia;
increasing support from public policy, such as incentives
for electric vehicle adoption.

Outcome: We will continue our collaborative
engagements with PLN through the AIGCC and actively
monitor its compliance with decarbonisation strategies
over the short-, medium-, and long-term, notably thetimetable to phase out coal-based emissions in line with
1.5°C temperature scenarios.

Reference to individual stocks is for illustration purpose only and does not guarantee their continued inclusion in any portfolio, nor constitute a recommendation to buy or sell.

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Principle 10

Case study: Setting concrete targets at India’s biggest cement company (equity)
Last year, we participated in a collaborative engagement
group organised by CA100+, an investor-led initiative
aimed at getting the world’s largest greenhouse gas
emitters to reduce emissions. The target was UltraTech
Cement,14 India’s biggest cement company.
Issue: UltraTech operates in a hard-to-abate sector ina country whose electricity supplies are dominated bycoal-fired power. As a result, its carbon intensity is one of
the highest, both in Asia and amongst its peers. Over theyears, there has been little material improvement in thecompany’s carbon intensity and it had yet to announce a
strategy to move towards a lower carbon future.
In 2021, the company’s high emissions had caused us tosell the shares held in our Asia Ex-Japan Equity regional
portfolios, where emission intensity benchmarks are
relatively tight. However, we continued to hold them in
our Indian equity portfolios, where benchmark emission
intensities are relatively high and where UltraTech ispart of the index. Having already engaged the company
directly ourselves with little noticeable effect, we
believed the company represented an important target
for a collaborative effort by CA100+.
Engagement: In our previous direct engagements with
UltraTech, our focus had been on getting the company
to improve its current carbon emissions. The focus of
our collaborative engagement was more on strategy
and, specifically, that set by the Disclosure Framework
Indicators established by CA100+. As a result, our priority
targets for UltraTech in 2022 and 2023 are:●●to reduce greenhouse gas emissions in the years to2025 on a clearly-defined path (Indicator 4);
to lay out a decarbonisation strategy that explains
how it intends to meet its medium – and long-term

greenhouse gas reduction targets (Indicator 5);
●

●

●

●

to make a commitment to aligning its capital
expenditure plans with its long-term greenhouse gas
reduction target, or to phase out planned expenditurein unabated carbon-intensive assets or products(Indicator 6);
to introduce an executive remuneration schemethat includes climate change performance elements(Indicator 8.2);
to acknowledge that it has responsibility for helping
achieve a just transition to a net zero economy(Indicator 9); andto make a commitment to implementing therecommendations of the TCFD (Indicator 10).

Outcome: We were encouraged by the latest CA100+
investor group meeting, noting that UltraTech had
been receptive to what participants had to say and hadsince incorporated some recommendations in its latest
sustainability report, including:●●●

adopting TCFD disclosures and conducting physicaland transition risk analyses;
having its carbon targets verified by the UN-backed
Science Based Targets initiative, with the aim of
reducing greenhouse gas emissions by 27% by 2022
– in line with the global target of cutting climate
warming to 2°C; andcommitting itself to net zero carbon by 2050.

We will continue to engage UltraTech, both directly andcollaboratively, and monitor the company’s progress indelivering its transition strategy in accordance with its
interim and long-term targets.

Reference to individual stocks is for illustration purpose only and does not guarantee their continued inclusion in any portfolio, nor constitute a recommendation to buy or sell.

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

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

●

●

●

additional meetings and engagement, including meetings
with more senior management, where appropriate;
collaborative engagements, where like-mindedshareholders 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 themost appropriate way, given the nature of the issue. Somemight want to follow up, others divest.
When an incident raises concerns about the ESG
performance of a portfolio company, we may take a dual
approach. On the one hand, we put the company throughour evaluation frameworks to determine whether weshould continue to hold it in the portfolio. On the other, we
may engage with company management to urge change.
(See our case studies for examples of this engagement.)
In some cases, we may join with other investors to escalate
the issue. A good example is Climate Action 100+ (CA100+),
a collective engagement group referred to underPrinciple 10.
Escalation timelines may differ, depending on the region
and the issue in question. While many engagements touchon 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 selectthe method of escalation.

With our Japanese Equity holdings, the initial assessment
will be made by our analysts in the Japan Sustainable
Investment department, who are responsible for proxyvoting and engagement. An analyst will work with therelevant portfolio manager and sector analyst to engage
with the company according to priorities based on thegravity of the issue, the company’s response and the weightof the holding in the portfolio. 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 determinedthat there is a high likelihood of long-term damage tothe company, the analyst may remove the stock from theinvestment universe. Any such evaluation will be madeindependently of any investment decision by the portfolio
manager. In addition, when governance issues are revealed bythis evaluation process, we will in principle seek to express ouropinion through our proxy voting activity.

Our investment teams have thediscretion to escalate in the mostappropriate way, given the nature of
the issue. Some might want to follow
up, others divest

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 the severity of the issue and thebroader 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 interests of our clients.

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OutcomeAs we have suggested under earlier principles, ourgeneral policy in our Asian businesses is to rely, where
possible, on one-to-one engagements. Particularly inJapan, escalation involving a group of investors is rare,
given the complications associated with large and joint
shareholdings and the cultural aversion to public challenge
or conflict. Having said that, we are not afraid to be robustwith companies where we think there are failings, both infinancial performance and stewardship. And we will escalate
where we think that we can improve the outcome for ourinvestors. The case studies that follow give a flavour of how
we escalate issues when they occur. Other examples can befound throughout this document.

Case study: Mettle lacking in the governance of a substantial Japanese steel group (equity)
The company is a big Japanese steelmaker owned by
our Japanese Equity portfolios.
Issue: We had concerns about the independence of thecompany’s oversight and its capital policy. The entire
board consisted of directors from the parent company.
Meanwhile, approximately ¥70 billion in cash, equivalent
to 35% of total assets, was deposited with or lent to theparent. This cash was not used for business activities andcontinues to be a drag on return on equity.
Action: We raised questions over the independence ofthe board and the inefficiency of the capital structure,asking what plans there were for the future use of
the cash. The company’s response was that the board

composition helped maintain management stability,
while it was retaining flexible reserves in cash to support
sustainable growth. We replied that we considered that
there was room for improvement and requested that ittake action on both issues.
Outcome: The company has continued to show nocommitment to raising the number of genuinely
independent directors on its board, nor has it outlined
plans to improve its balance sheet and make more
effective use of the cash, such as earmarking strategic
investments. As our minimum requirements had notbeen fulfilled and we did not expect any improvementin the short term, we sold the shares.

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Principle 11Case study: Tackling quality issues at an electronics company (equity)
The company is one of the world’s leading
manufacturers and sellers of electrical and electronic
products and systems.
Issue: Immediately after the annual general meeting in
June 2021, the company announced an investigation
into its quality control practices. Given that there had
been no mention of this material information at theimmediately preceding meeting, the timing of theannouncement suggested a weak governance system.
Engagement: We held a meeting with directors in July.
We pointed out that this was just the latest of several
similar incidents. Each time, a recurrence prevention
plan had been drawn up and an internal control system
put in place, but measures to address the root causes,
such as changing employee awareness and corporate
culture, were neglected. Management recognition of
the seriousness of the problem needed to be improved,
while appropriate action was not being taken tocommunicate and disclose information. We requested
that the company take prompt action to rectify thesefailings to prevent a recurrence of the quality control
problems.
The company’s interim report published in December
2021 found both quality and inspection problems insome cases. However, it took around a month for thereport to be published, delaying remedial action andsuggesting a lack of crisis awareness.
We interviewed management again in February 2022.
We learned that reforms to quality, organisational andgovernance processes had been put in place. Concretemeasures included the appointment of an officer fromoutside the company to take charge of the Quality
Reform Promotion Division, the use of external reviews
and the adoption of a management approach focusedon quality inspection processes. It remains to be seen
whether these actions will be sufficient to prevent further
incidents. We asked to be kept informed of progress.
Interviews were again conducted in May 2022 todiscuss the third report of the internal investigation.
Although progress had been made, there were still many
items outstanding. We asked a number of questions
relating to the organisational culture, including poor
communication and lack of crisis awareness. At thatstage, it was not possible to judge from the company’s
answers that the measures it had put in place to prevent
recurrence were functioning effectively.
Outcome: At the AGM in June, based on our dialogue
with the company and our dissatisfaction withthe efforts it had made to date, we voted against
management. This included voting against the reelection of the company president, a vote which
actually passed with an approval rate of 58.46%. The
final investigation report was published in October, withadditional preventative measures being announced
alongside the existing ones.
Since then, no serious incidents have occurred, and we
judge that the company’s efforts have been successful,confirming that the governance system is gradually
improving. However, we will continue to monitor thecompany’s corporate and organisational culture closely,
as reforms such as these will take time to take root.

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Principle 11Case study: An independent oil and gas exploration and production company that failed to live
up to our environmental expectations (equity)
This was an independent oil and gas exploration andproduction company owned by our Asia Ex-Japan
Equity team.
Issue: Over the year, as part of enhancing our ESGintegrated investment approach, we have tightened
our internal processes when it comes to the monitoring
and risk management of our portfolios’ greenhousegas (GHG) emissions intensity. Given that this company
operates as an independent oil & gas exploration andproduction company in ASEAN, which by nature of theircarbon intensive operations, produces significant GHG
emissions, this triggered our internal risk monitoring
controls. Our investment process does not automatically
exclude companies with high GHG emissions profile aslong as they have a credible transition plan to move awayfrom carbon intensive operations. As such, we conductedfurther due diligence to find out what, if any, plans thecompany had.
Engagement: When engaging the company in April 2022, it
said it had a strategy to deal with climate-related risk, which
included a framework plan to reach net zero by 2050.

However, it conceded that it was not practically possible forit to significantly decarbonise in the next five years.
It was clear that the company could not meet three ofthe commitments we require of companies if they are todemonstrate they have a meaningful interim strategy overthe next five years for managing the transition to zero carbon:●●●

reducing greenhouse gas emissions by half;
spending at least a fifth of the annual capital expenditurebudget on renewable energy;
reducing oil production revenues to below 30%.

Outcome: From our prior discussion with the company,and further due diligence conducted, we concluded thatthe company did not satisfy our stricter requirements.
Hence, we could not justify holding such a high emitterof greenhouse gases and therefore sold our position.
However, we will continue monitoring the company’s
progress towards their climate-related goals, particularly
their net zero by 2050 strategy and implementation of
their decarbonisation pathway

Case study: Failures of governance and pedestrian environmental progress at a major Asian
property group (fixed income)This is a large logistics real estate fund manager with
global operations. The company went private in 2018,
but we own publicly-listed bonds through our Asia Fixed
Income portfolios.
Issue: The company owns and develops logistics
properties, such as warehouses, but has had minimal“green” building targets, while only a small portion of its
portfolio could be regarded as sustainable. As a privatelyowned company, it is subject to significantly fewer
governance controls and restrictions on related-party
transactions and dividends than if it had remained listed. It
also faces only minimal reporting requirements and is not,for example, required to report significant transactions.
We saw an urgent need to increase the representationof green developments in the portfolio and to improvedisclosures and transparency, especially with regard to
significant and related-party transactions.
Engagement: We have engaged with the company onthese issues several times over the last two years.
In May 2021, during a call with a group of green bondinvestors, we voiced our concerns about the proportionof green developments. We pointed out that, at around
13% by number and only 8% by value, it was low and
we asked if targets had been set for improvement. The
response was that it did not have a specific target. On thesame call, we discussed a proposal by the company tolimit dividends to shareholders to protect bondholders.
We argued that any such limitation would be ineffective,
given that the company’s private status allowed it to pass
cash around the group via inter-company loans.
We followed up these concerns during 2022 with two calls
and six emails between May and August pushing for more
disclosure, notably on the company’s significant intercompany loans and related party transactions over theprevious year.
Outcome: The company has only been willing to disclose
minimal details, stating more would be published at a later
date. We felt that this was not acceptable, given the size,
opacity and impact of these transactions, and we sold outof the bonds shortly after. We will continue to monitor
the company to see if it improves its disclosure policy andwhether we want to invest again.

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Principle 12
Signatories actively exercise their rights and responsibilities.

Context
Proxy voting is one of the major elements of ourstewardship activity in our equity portfolios and we takegreat care to ensure that our voting serves the interestsof both companies and clients. Where we invest throughpassive strategies, we strive to incorporate stewardshipthrough the voting of proxies and the engagement process,where appropriate.
In our fixed income investments, we do not have the voting
rights that are available to shareholders, however we aim
to be active owners of assets by utilising other stewardshiptools, such as issuer engagement. We hold a small allocation(approximately 0.5% of our group AUM) in infrastructure
investments via sub-advised managers who are subject toan annual ESG evaluation.
We do not currently manage private equity or debt assets.
The Nikko AM Group Proxy Voting Policy establishes ourcompany-wide approach to proxy voting decisions. This
policy establishes the principles we use for determining theexercise of voting rights at the group level. Implementationof the group-wide policy is undertaken by our local
businesses, with the 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 the attributes of the local market.
As a result, there are some variations in how stewardship
activities, including voting, are implemented across thegroup. For example, our UK entity has a supplemental
proxy voting policy that applies to our Global Equity
strategy for addressing our environmental and social
principles.
The full text of our group Guidelines on Exercising Voting
Rights (as well as our supplementary Standards for Exercising
Voting Rights on Japanese Stocks) is available here with asummary of the main points listed below.
The group-wide policy underscores our focus on ESG inproxy voting decisions and also covers the following nonexhaustive 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,●

new share issuance, and●company control and takeover defences.

We are generally opposed to resolutions aimed at preventingchange of control. On the other hand, takeover defences may
be assessed positively if the acquisition risks are clear andexisting shareholder value would not be damaged.
We regularly vote and when doing so take account ofgroupwide policies and advice from proxy voting advisers,
where applicable, as well as other considerations like pastengagements and local policy.
Our voting principles are applied after full considerationof a company’s circumstances, with each corporate
governance principle to which we hold our investees being
considered. For the majority of resolutions, upon receipt ofadvisory research and voting recommendations, the teamresponsible for the security in question will analyse thereport and conduct further research where any issues havebeen flagged.
We aim to cast our votes on the same resolution consistently
across all vehicles that we manage, unless specificallydirected not to do so by clients in respect of their own
accounts. We consider requests from clients to override ahouse policy on a case-by-case basis. In a small numberof instances, segregated account clients have their own
policies, which we apply and may supplement with ours
where appropriate. We also have segregated account clients
who make and execute their own voting decisions. It is notpossible for clients in pooled funds to direct our voting.

Proxy voting is one of the major
elements of our stewardship
activity in our equity portfolios
and we take great care to ensurethat our voting serves the interestsof both companies and clients

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Principle 12

For Japanese Equities (which account for over three quartersof our firmwide equity AUM as at December 2022), ourStandards for Exercising Voting Rights on Japanese Stocks
establish detailed decision criteria. The Japan Sustainable
Investment department is responsible for directing all
voting proposals for holdings in both actively-managed
and passive portfolios. It decides whether to approve ordisapprove after taking into account past engagementswith investee companies. Advice from ISS based on our
proxy voting guidelines is one of the inputs in the decisionmaking process, but this advice is used for reference
only. The Investment Support and Planning (ISP) team is
responsible for exercising voting rights for non-Japanesestocks, where the investments are held via Japan-domiciled
feeder funds on behalf of Japanese investors. In somecases, when there are important resolutions, the ISP teamtakes account of the opinions of the overseas investment
management subsidiaries who are closest to the market
where the investee company is based. The overseas
investment team may also engage with local companies
whose securities are held in Tokyo in co-ordination with the
ISP team. 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 Group entity makes
the ultimate decision on how to exercise these voting rights,
which are then executed by ISS.
Voting decisions for all of our group entities are executed byISS. We use ISS to monitor our share and voting rights via a
web-based platform. This shows us the accounts for which
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

cast is also stored by ISS, allowing us to look back at historicvoting records to ensure all service standards are being met
and all votes are being cast as directed.

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

Activity
A summary of our firmwide voting records is listed in
the tables that follow (this information is also provided
in our annual Sustainability Report). During the year
we analysed 7,274 shareholder meetings and voted on
75,242 resolutions.
We cast votes on all shares where there are no legal, clientor technical constraints. Examples of where we may not
be able to vote include those where power of attorney has
not been granted by a client, or in markets where share
blocking is applied. These include bearer shares in the Swiss
market, some stocks in the Norwegian and German markets
and Egyptian market stocks. Such instances accounted forless than 1% of all resolutions in 2022.

Breakdown of voting records by region, January to December 2022

RegionAPAC ex Japan
EMEA
Japan
Latin America
North America
TOTAL

Number ofshareholder
meetings
2,452
1,124
2,399
216
1,083
7,274

Number of
resolutions
19,49817,02424,904
2,003
11,81375,242

Votes for
Vote for
Vote against Vote against
management management management management(number)(%)(number)(%)
16,820
86.3%
2,678
13.7%
15,573
91.5%
1,451
8.5%
21,275
85.4%
3,629
14.6%
1,798
89.8%
205
10.2%
10,657
90.2%
1,156
9.8%
66,123
87.9%
9,119
12.1%

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Principle 12

Overall, across all regions, we voted against managementin 12% of resolutions. The most common reason for voting
against management was in relation to the election of
directors. A lack of independence amongst non-executive
directors often prompts us to oppose management’s wishes
in these votes. The case study below, “Pushing governanceup the agenda at a major Japanese food company (equity)”,
and another under Principle 8, “Voting against management
and a service provider’s recommendation (equity)”, illustrate
the point. On the latter occasion, we disagreed with ISS’srecommendation on a shareholder resolution calling for an
independent chair separate from the CEO. On this occasion
we did not require engagement with ISS as we understood
the rationale for their advice, but we voted against theirrecommendation and in line with our own internal policy.
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 Asia Ex-Japan Equities), ourpolicy is to release the information to clients on request andin line with local customs and regulations.

Fixed income
As previously stated, we are not able to exercise the samelevel of influence as holders of equities in our fixed income
allocations since the instruments we hold do not conferproxy voting rights. Nonetheless, we aim to exercise ourstewardship responsibilities through other means, such as
by engaging with market participants and ensuring that our
product offering is in line with the needs of our clients.
When participating in the primary bond issuance markets,
our investment teams review prospectuses 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 advisers on the terms and conditions ofissuances in which we are interested, including providing
feedback and, where applicable, seeking amendments
to terms and conditions in legal bond documentation. In
our experience, issuers accessing the bond market for the
first time tend to be more receptive to feedback on legal
documentation and contracts. For private companies’ bondissuances, we also ask for access to further details provided
in trust deeds, such as, for example, financial disclosures.
It should be noted, however, that in the Japanese bondmarket this approach is less easy to adopt for publiclytraded corporate bonds.

Outcome
Although we may not be a widely recognised namein global markets we recognise and appreciate our
responsibilities as stewards of our clients’ capital. The
following are examples of resolutions that we voted
on during 2022. We have provided below examplesof resolutions that we voted on during 2022. We havenot always been able to use our influence to generate
the outcomes we would have desired, however we willcontinue to use the influence that we have to act in what
we believe is the best interest of our clients and wider
stakeholders and to encourage best practice in investee
companies where possible.
As has been already described, our Fixed Income allocations
do not confer voting rights and our small stature in mostfixed income markets or investment in sovereign issuers canlimit our influence, but as described in earlier case studies
such as “The Danish mortgage bond market – an exampleof end-client and broker engagement”, “Moving an energyintensive company in the right direction” and “Keeping
the heat on an Indian steel maker to be more green”, we
aim to use the influence we do have to promote the best
outcomes for stakeholders.

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Principle 12Case study: Unease at Amazon15 on a range of concerns from human rights to politicallobbying (equity)
The online retailer was held in our Global Equity portfolios.
Issue: At the AGM in May 2022, a number of proposals
were put forward by both management and shareholders.
We discuss below the background to some of these votes
and explain how we voted and why.
Activity: Executive pay – We voted against amanagement proposal to ratify the compensation of the
new CEO and other so-called “named executive officers”(NEOs). This was driven by a large equity grant to the new
CEO and also large time-vested awards that were granted
to other NEOs. We believed that these lacked objective
performance criteria, exacerbating a misalignment
between pay and performance. The vote was passed with
an approval rating of just under 56%.
Shareholders’ resolutions – We voted for shareholders’
resolutions on a number of human rights issues since
we felt that investors would benefit from increasedtransparency and disclosure on how the company was
managing these risks:●●●

The commissioning of a third party report assessing thecompany’s human rights due diligence process. The votefailed, gaining just under 40% of votes in favour.
Increased reporting on how the company wasprotecting the rights to freedom of association andcollective bargaining following increasing public
scrutiny, high staff turnover and injury rates in its
domestic warehouse operations and allegations ofanti-union activities and sourcing from forced labour.
The vote failed, gaining an approval rating of justunder 39%.
The commissioning of a third party study and reporton “Rekognition”, the company’s facial recognition
technology, looking at the extent to which it may
threaten privacy and civil rights, unfairly target peopleof colour, the extent to which such technologies may
be marketed and sold to authoritarian or repressive
foreign governments, and the financial or operationalrisks associated with these human rights issues. This
vote also failed, garnering favourable votes from justover 40% of those cast.

We also supported shareholder resolutions related toworking conditions:●●

To adopt a policy of including non-management
employees as board candidates to help resolve worker
grievances. This vote failed, with just under 13% of votes
in favour.
To commission a third party audit of working conditions
following reports of unsafe working practices and unfair
treatment, including the findings by the US Departmentof Labor in 2021 relating to serious health and safety issues
faced by Amazon warehouse employees. This resolutions
failed, gaining an approval rating of just under 44%.

Environment – We voted for a resolution requesting anannual report on plastic packaging pollution, including any
company strategies or goals to reduce the use of plastic
packaging. Concern over the environmental damage causedby plastics is rising and regulations may come into force inseveral jurisdictions that would limit the use of single-use
plastic packaging. Disclosure in line with the resolution
would therefore help shareholders gauge whether thecompany is appropriately mitigating related risks. The votefailed, but with an approval rating of nearly 49%.
Lobbying – We voted for a proposal requesting disclosureof direct and indirect lobbying payments and policy as we
felt that this would help shareholders better assess risks
and benefits associated with the company’s participationin the public policy process. The vote failed, but won an
approval rating of 47%.
Diversity – We supported a resolution requesting areport on the median pay gap at the company by genderand racial breakdown, including information on its policy
and goals to reduce compensation disparities based on
gender and race. Following lawsuits and fines concerning
hiring and pay practices, we believed that such increased
disclosure would allow shareholders to better assess thecompany’s management of related risks and benefits. The
vote failed with an approval rating of just under 29%.
We do not doubt the power of the retail business or
the enduring growth offered by Amazon Web Services.
However, the company’s premium valuation and ourincreasing concerns about the company’s ability to sustainhigh returns on capital, caused us to sell our position in
Amazon during the second quarter of 2022 therefore will
not be taking further action on these resolutions.

Reference to individual stocks is for illustration purpose only and does not guarantee their continued inclusion in any portfolio, nor constitute a recommendation to buy or sell.

15 

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Principle 12Case study: Using our voting power to encourage management into action over under-usedcash (equity)
This is a Japanese pharmaceutical company held in ourJapanese Equity portfolios.
Issue: The company had no debts and had accruedso much cash on its balance sheet that it exceeded its
market capitalisation. The cash did not contribute to
the main business and offered low returns. It was also
affecting the valuation of the shares as the market hadformed a negative view of the company’s managementof its surplus capital. In the absence of any moves by thecompany to improve its capital efficiency, a shareholder
resolution was proposed that a one-off dividend be paid
to return some of the cash to shareholders.
This move prompted the company to announce that
it would be more aggressive in acquiring “in-licensed”
drugs to support sustainable long-term growth as it
has limited research and development capabilities
to develop its own drugs. However, it argued thatthe crowded and intensifying competition for new
drugs, combined with the possible need to deal withmultiple concurrent opportunities, meant there was arequirement for it to hold sufficient cash to move quickly
as and when necessary.

Activity: Despite the arguments of the company, we
judged that the proposed additional dividend would
be modest in relation to the company’s net cash and its
investment needs and that it would not cause problems
for the company’s financial health. We knew that the
proposal would be rejected since the parent company
held the majority of voting rights. Nonetheless, werecognised that it was important to support efforts toenhance shareholder value and therefore voted for the
proposal. As expected, the resolution failed, picking up
just under 21% of the votes cast.
Outcome: Despite the vote’s failure, it has clearlyengendered a more favourable atmosphere for minority
shareholders. Capital efficiency was discussed at theboard meeting following last year’s general meetingof shareholders, further to which a new medium-term
management plan – including capital allocations – wasannounced. We continue to evaluate the progress madeby the company and will encourage management toclearly express its intentions through dialogue.

Case study: Voting to improve investment efficiency at an IT group (equity)
This company, a large independent IT solution vendor inJapan, is held in our Japanese Equity portfolios.
Issue: At the AGM in March 2022, a large institutional
shareholder proposed the appointment of two
additional outside directors to the board. It argued
that, instead of reinvesting profits in its core businessor returning funds to shareholders, the company hadfor some time directed investment to areas wheresynergies with the core business were unclear. It had
neglected to allocate capital in a way that contributed
to sustainable growth or medium – and long-term
corporate value, resulting in a depressed valuation
and a return on equity that had fallen to half the levelof peers. The investor believed that strengthening theboard with two outside directors with experience infinance, accounting and capital allocation would boost
independent oversight, help improve capital allocationand enhance corporate value.
Activity: We interviewed the candidates proposedby the shareholder and concluded that they would

be a welcome addition to the board and strengthen
management oversight. We therefore voted in favour ofthe shareholder resolution. In the event, the resolution
failed, gaining only 39% of the vote.
Outcome: Although the resolution failed to pass, it had
positive effects. In August 2022 the company establisheda Corporate Value Enhancement Committee (CVEC)
with the aim of adopting advice and suggestions fromstakeholders on how to improve the company’s value.
In September, we had a meeting with a company
director, telling him why we had voted for the shareholder
proposal and against management. Despite the failure,
we said it was still our expectation that the management
would accept independent outside directors to improveoversight of the company’s management.
Subsequently, the activist shareholder which had madethe original proposal nominated four independent
directors at an extraordinary general meeting inNovember, two of whom were accepted by the company.

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Principle 12Case study: Promoting healthier governance at a medical equipment company (equity)
AdaptHealth, held in our Global Equity portfolios,
provides home medical equipment, medical supplies
and related services in the United States.
Issue: When AdaptHealth became a public company
following the acquisition of AdaptHealth Holdings by DFB
Healthcare Acquisitions in 2019, several charter or bylaw
provisions (rules established by the board of directors at thetime a company is started that govern how the company
is run) were established that fall short of what we consider
best governance practice. This including a classified board,which prevents shareholders from holding directors
accountable on an annual basis, can entrench management,
and can deter takeovers and proxy contests. In our opinion
this structure therefore adversely impacts shareholder rights.

Activity: Due to the classified board structure, at theAGM in June 2022 three Directors of the governancecommittee ran (unopposed) for re-election. Given theboard’s failure to remove the classified board structure or
subject it to a sunset requirement, we withheld our votes
in line with our views on board effectiveness (where a
director runs unopposed, a vote against the resolution
is not possible and he or she only needs one vote to beelected; in such cases, a ‘withhold’ vote is seen as a publicstatement of disagreement whereas an abstention could
be seen as ‘undecided’).
Outcome: As expected, the votes passed with withhold
rates of 17%, 11% and 21%.

Case study: Pushing governance up the agenda at a major Japanese food company (equity)
Background: The company is a large Japanese foodproducts company with a growing business in North
America owned in our Japanese Equity portfolios. We
were concerned about the long tenure of the company’s
outside directors.
Activity: We informed the company that we wereplanning to introduce new voting guidelines opposing
the reappointment of outside directors who had been
in office for more than 12 years. This would mean wewould vote against one of the company’s directors at thenext annual meeting of shareholders.
The company asked for a dispensation as it was
performing well and increasing shareholder value.
Moreover, it argued that the individual in question

was a former director of the Bank of Japan and wastherefore of sufficient standing to hold the company’schairman to account. It therefore requested that he beallowed to be reappointed.
Outcome: A proposal for the reappointment of theoutside director was submitted to the annual general
meeting. After carefully considering and debating thecase, we ultimately voted against the reappointment as amatter of principle. We also believed that this would act
as an example to other companies, demonstrating ourstrong views in this area.
Result of the resolution: The resolution passed with avote of 68% in favour.

Case study: Boosting independence on the board of a Japanese electronics group (equity)
Background: This information technology andelectronics group is held in our Japanese Equity
portfolios. We identified the independence of the board
as a clear area for improvement for the company. One
outside director was a senior manager at the company’s
biggest lender, from which outside directors had been
accepted for over 20 years.
Action: We have consistently voted against theappointment of this director for at least five years. In
the absence of any movement, recently we increased
the pressure, telling the company that we could notregard directors appointed from the same major lenderfor decades to be genuinely independent. We said
we needed it to appoint outside directors who could
demonstrate guaranteed independence.
Outcome: At the general meeting of shareholders inJune 2022, the controversial outside director was not
put up for re-election and a more independent outside
director was appointed instead. As a result, all of thecompany’s outside directors can now demonstrategenuine independence.

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Principle 12Case study: Shareholder differences at a large Japanese electronics group leads todeadlock (equity)
This is a large Japanese multinational conglomerate witha number of diversified products, including personal
computers, consumer electronics, home appliancesand medical equipment. It is held in our Japan Equities
portfolios.
Issue: In November 2021, the company announcedplans to split into a number of separate companies
through spin-offs. This was followed by discussions
about the plans with a variety of stakeholders, including
shareholders and the relevant authorities, resulting infurther refinement of the proposals.
Activity: At an extraordinary general meeting in March
2022, the company proposed a resolution seeking
support for the planned restructuring. We voted infavour of the proposal since we believed that spinning
off businesses with different characteristics (e.g. businessrisks and cycles) would improve management efficiency,
reduce information asymmetries, and therefore
enhance corporate value. Furthermore, we felt that, by
maintaining public listings, the spun-off companies
would ensure that current shareholders retained theopportunity to benefit from medium – to long-term
corporate value enhancements. This plan was rejectedby shareholders, winning approval from holders of justunder 40% of the votes.
At the same meeting, shareholders were asked tovote on an alternative plan proposed by a large
activist investor the second largest shareholder inthe company. It called for the company to continue
reviewing alternative options and in particular to engage
actively with potential buyers and investors among

private equity firms. The position of the company’s
management was that, while they would not rule out
other options, they were best placed to decide the bestsolution and at that time they remained of the opinion
that a strategic restructuring represented the best courseof action, arguing that investing a disproportionate
amount of time and resources in providing formal due
diligence opportunities would be a diversion when theyshould be focusing on implementation of the strategic
reorganisation.
We felt that, were the company to be taken private,
the purchase price would be unlikely to be as much as
the mid – to long-term value that would be realized
if the company were to be restructured into different
entities and kept listed. We therefore voted against theshareholder resolution since we felt that it was not in theinterests of minority shareholders. This resolution also
failed, garnering 44.6% of the votes cast.
Outcome: Since both the company’s proposal and theshareholder’s proposal were rejected, the management
began seeking to go private in order to consolidate
divided shareholder opinion. Three months later, at
the June 2022 AGM, we opposed the appointment of
non-executive directors proposed by the same activist
investor whose aim was to realise value for themselvesand not necessarily in the interest of wider shareholders
by taking the company private. In February 2023, thecompany received a bid from a Japanese private equity
firm. We continue following developments at thecompany and will use our rights as shareholders to act inwhat we believe is the best interest of our clients.

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Appendix

Appendix – Case study Index*
Page Number
Principle 4
Case study: Anticipating the shock to markets of forced de-listing of Chinese companies from US stock exchanges

27

Case study: Monitoring portfolio climate change risks and opportunities

29

Principle 6
Case study: Aligning an investment portfolio to meet the client’s ESG preferences

41

Case study: The Danish mortgage bond market – an example of end-client and broker engagement

41

Case study: Helping pension fund clients prepare to sign Japan’s Stewardship Code42

Case study: Incorporating client feedback into our company engagements

42

Principle 7
Case study: ESG factors drive decision to sell major Japanese measuring instrument maker

49

Case study: Taking a stance against modern slavery in New Zealand50

Case study: Moving an energy-intensive company in the right direction

51

Case study: Improving ESG disclosures at a large Singaporean agribusiness

52

Principle 8
Case study: Voting against management and a service provider’s recommendation54

Principle 9
Case study: Decarbonising executive compensation at a Japanese oil group

60

Case study: Improving independent oversight at an insurance company

60

Case study: Successfully pushing a chemical company to be greener and more diverse

61

Case study: Controversial sourcing policies at an IT company

61

Case study: Following-up on our efforts to improve environmental commitments at a US building products group

62

Case study: Keeping the heat on an Indian steel maker to be more green

63

Case study: Probing the green commitment of one of Asia’s biggest banks

63

Principle 10
Case study: Sparking awareness of ESG at Indonesia’s biggest power company

65

Case study: Setting concrete targets at India’s biggest cement company

66

Principle 11Case study: Mettle lacking in the governance of a substantial Japanese steel group

68

Case study: Tackling quality issues at an electronics company

69

Case study: Oil and gas company failed to live up to our environmental expectations

70

Case study: Failures of governance and pedestrian environmental progress at a major Asian property group70

Principle 12Case study: Unease at Amazon on a range of concerns from human rights to political lobbying

74

Case study: Using our voting power to encourage management into action over under-used cash

75

Case study: Voting to improve investment efficiency at an IT group

75

Case study: Promoting healthier governance at a medical equipment company

76

Case study: Pushing governance up the agenda at a major Japanese food company

76

Case study: Boosting independence on the board of a Japanese electronics group

76

Case study: Shareholder differences at a large Japanese electronics group leads to deadlock

77* Please note that, in some instances, case studies have been anonymised on request of the underlying team to ensure that our engagements remain productive.

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being offered to a limited number of investors in the UAE
who are (a) willing and able to conduct an independent
investigation of the risks involved in an investment in such
Strategy, and (b) upon their specific request. The Strategy
has not been approved by or licensed or registered with
the UAE Central Bank, the Securities and Commodities
Authority or any other relevant licensing authorities orgovernmental agencies in the UAE. This document isfor the use of the named addressee only and should
not be given or shown to any other person (other thanemployees, agents or consultants in connection with theaddressee’s consideration thereof ). No transaction will
be concluded in the UAE and any inquiries regarding theStrategy should be made to Nikko Asset Management
Europe Ltd.
MSCI: The MSCI information may only be used for yourinternal use, may not be reproduced or redisseminatedin any form and may not be used as a basis for or acomponent of any financial instruments or products
or indices. None of the MSCI information is intended toconstitute investment advice or a recommendation to
make (or refrain from making) any kind of investment
decision and may not be relied on as such. Historical
data and analysis should not be taken as an indication or
guarantee of any future performance analysis, forecast or
prediction. The MSCI information is provided on an “as is”
basis and the user of this information assumes the entire
risk of any use made of this information. MSCI, each of its
affiliates and each other person involved in or related tocompiling, computing or creating any MSCI information(collectively, the “MSCI Parties” ) expressly disclaims all
warranties (including, without limitation, any warranties
of originality, accuracy, completeness, timeliness, noninfringement, merchantability and fitness for a particularpurpose) with respect to this information. Without limiting
any of the foregoing, in no event shall any MSCI Party
have any liability for any direct, indirect, special, incidental,
punitive, consequential (including, without limitation, lost
profits) or any other damages. (www. msci.com).

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