environmental, social and governance report...particulates down to i.0 microns, sealed between two...

BUILDINGSTRONGER

PORTFOLIOS

Environmental, Social and Governance reportEmerging Market and Asia Pacific Equities (EMAP)

Third Quarter 2020

We believe effective investment stewardship can materially contribute to helping build

stronger portfolios over the long term, for our clients.

George GatchCHIEF EXECUTIVE OFFICER

J.P. MORGAN ASSET MANAGEMENT

ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORT

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Our aspirations for engagementWhen it comes to corporate engagement, being one of the world’s largest investment managers bringsadvantages but also challenges.

The starting point from which we engage with the companies in which we invest is strong. We aretypically large shareholders, we have a reputation for being long term partners and our engagements areunderpinned by the in depth research that comes with a large, well-resourced analyst team.

The challenge is to bring together our sizeable internal resources - from research to a specialistsustainability function - to ensure we pursue a coherent agenda based on consistent principles. Inparticular it is important that we understand the relationship between sustainable goals and financialoutcomes, as it is engagement at this intersection which drives the greatest long term value for ourclients.

The purpose of this report is to explain how we are setting about achieving these aspirations and toshare examples of progress as we continue on our journey towards ever more productive and impactfulcorporate engagement.

Our frameworks for engagementThere are two frameworks that you will see referenced in this document:

� Our Five Investment Stewardship Principles are the highest level statement of universal prioritiesthat we have. They are set by our Global Sustainable Investing Function and are principles webelieve will have universal applicability and stand the test of time.

� Our Research Frameworks come entirely from the opposite, bottom up perspective. Across globalequity we have a 40 question ESG Checklist which ask the same questions of every company underglobal coverage to establish a baseline of their ESG credentials. In Emerging Markets and AsiaPacific we also have a Materiality Framework . This sees our specialist sector analysts determinewhich are the most important Environmental, Social and Governance issues within individualindustries, and score companies on those in order to identify leaders and laggards.

We hope the case studies and data contained in the following pages help illustrate how these principlesand frameworks work together to create a coherent and effective approach to corporate engagement.

Pauline Ng , Head of ASEAN

Chair of APAC AM ESG Leadership Team

Austin Forey , Head of GEM Fundamental Team

GovernanceStrategy alignment

with the long term

Human capital

management

Stakeholder

engagementClimate risk


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Engagement: Environmental, Social & Governance

J.P. Morgan Asset Management believes that companies shoul d act in a socially responsiblemanner. To this end, we are signatories to the United Nations -supported Principles of ResponsibleInvestment (PRI), which commits participants to six Princi ples, with the aim of incorporatingEnvironmental, Social and Governance (ESG) criteria into t heir processes when making stockselection decisions and promoting ESG disclosure. As a firm , we prefer to invest in companies thatengage in social and environmental behaviours likely to enh ance their reputations, rather thancompromise them. We believe that such factors are key determ inants of sustainability and,ultimately, can have a material impact on share prices over t ime.

J.P. Morgan Asset Management also recognises its wider stew ardship responsibilities to its clientsas a major asset owner. To this end, we support the UK Stewards hip Code, which sets out theresponsibilities of institutional shareholders in respec t of investee companies. J.P. Morgan AssetManagement endorses the Stewardship Code for its UK investm ents and supports the Principles asbest practice elsewhere. We believe that regular contact wi th the companies in which we invest iscentral to our investment process, and we recognise the impo rtance of being an ‘active’ owner onbehalf of our clients.

We have significantly advanced our ESG and Sustainability research in Emerging Markets and Asia Pacificby establishing a materiality framework which now covers over 1,000 companies. The basis of “materiality”is to identify the Environmental, Social or Governance issues that are most likely to have a materialnegative financial impact on the company were they to be mismanaged, or potentially a material positiveimpact if they are managed well. Using the sector expertise of our global network of 100+ researchanalysts, we identified the five most material issues across 54 sub-industries and then scored eachcompany 1-5 with the rating backed up by detailed research commentary. The implementation of thisresearch framework has deepened our understanding of what best practice looks like for sustainability andwe used this template to engage with companies.

Our materiality scores are of course a constantly evolving piece of research and this quarter there wereupwards and downwards revisions.


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Engagement: Environmental, Social & Governance

Norilsk Nickel

On the negative side we reduced our score for Norilsk Nickel, a Russian miningcompany, as a result of a high profile large oil spill at one of the company’s facilitiesin May. Since the incident our EMEA Commodities analyst Veronika Lysogorskayahas written seven research notes related to the spill and has had several one-on-onemeetings with company management. We have expressed our views to managementon how we would like them to respond to the disaster, and while we continue tomonitor their actions we have reduced our score on our materiality questions toreflect the clear ESG violation. For example within the Mining sector we ask “howeffective has the company been in preserving the natural environment?” and we nowhave the company with the lowest possible score of “5” on this question. We willcontinue to monitor the incident and once we feel the company has made progress inremedying the situation and upgrading internal processes to reduce the chances ofany recurrence then we would revisit the scoring.

BOE Technologies

Outside of our materiality work, another typical engagement is to follow up withcompanies where third party research has identified potentially concerning issues. Asmuch as we do detailed work on every name we cover, we are always open to thepossibility that specialist sustainability houses and NGOs may spot an issue that wemissed. This quarter a research report by the Australian Strategic Policy Institute wasbrought to our attention in which a company in our universe, BOE Technologies, wasalleged to use forced labour in its supply chain. Our APAC tech analyst, Paul Chan,engaged with the company who responded by sharing an audit report that thecompany had commissioned from the independent Responsible Business Alliancewhich gave their supply chain a clean bill of health. We have not taken specific actionas a result of the interaction, but it is an area we will look to deepen our knowledge ofover time.

Veronika LysogorskayaExp: 14/9

Paul ChanExp: 26/20

Climate risk

Human capital

management

Walmart de Mexico

On the positive side we revised up the scores of Walmart’s separately listed Mexicansubsidiary after a meeting between the company and our LATAM Consumer Analyst,Aline Gaspar. Although Walmex had scored highly in our initial work, there were afew areas we had held back awarding our highest “1” score. A combination of thecompany’s latest sustainability publications as well as its response to the Covid crisisled us to upgrade its scores on several questions. On the issue of its workforcetreatment, we felt the company really proved its credentials during the Covid crisis bychanging its salary payments from biweekly to weekly, providing separatetransportation for employees with difficult commutes and sending home any elderlystore packers with financial support. On the question of sustainable sourcing we hadbeen looking for the company to commit to clearer targets and in its latestsustainability work it has guaranteed zero deforestation from the palm oil used inprivate brands by the end of 2020 (vs 85% in 2019) and also to buy 100% of seafoodfrom certified sustainable sources or those endorsed by the Fishery ImprovementProject by 2025 (vs. 30% in 2019).

Aline GasparExp: 16/16

Human capital

managementClimate risk


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Proxy Voting

J.P. Morgan Asset Management exercises the voting rights of shares held in client portfolios, whereentrusted with this responsibility. We seek to vote in a prud ent and diligent manner, based exclusively onour reasonable judgement of what will best serve the financi al interests of our clients. So far as ispracticable, we will vote at all of the meetings called by com panies in which we are invested.

A summary of key voting statistics and activity for the perio d is detailed below:

Meetings voted 161 (99.4%)*

Votes with management 1,330 (89.8%)

Votes against management 101 (6.8%)

Abstentions 50 (3.4%)

*a further 1 meeting was not voted due to share blocking and/or conflicts of interest

The following examples should help illustrate the principles behind which we are casting our votes:

Eva WangExp:15/3

Governance Strategy alignment

with the long term

Human capital

management

Stakeholder

engagement

Inner Mongolia Yili

Inner Mongolia Yili is the leading dairy company in China and has been a longterm holding in several JPMAM investment funds. At the recent AGM we voted infavour of the company’s employee stock purchase plan, which contrasted withISS’ recommendation to vote against the proposal.

The company was seeking approval to buy shares in the secondary market onbehalf of its employees who would be funding the purchases themselves withoutany cost to the company. We encourage employee stock ownership as part ofour Second Stewardship Pillar of Strategy Alignment With The Long Term, whichreflects our belief that companies with employee shareholding are likely to besuperior and more sustainable long term investments. This scheme achieves thegoal of increasing employee equity participation without any cost to minorityshareholders. The ISS recommendation to vote against the plan cited insufficientdisclosure, but our analyst Eva arranged a meeting with the company anddiscovered that the relevant disclosures existed but had been missed by the ISSreport.

Regular readers of this report will remember that last year we engaged with Yilion a restricted share incentive plan with a big portion for senior managementcompensation which eventually resulted in the company reducing the level of payit was proposing for its Chairman as well as reducing the dilutive impact of itsexecutive compensation plan. These votes encapsulate the approach we try totake with corporate engagement: challenging companies when we think they aredetracting from the interests of our clients but supporting them when our goalsare aligned.

Source: JPMorgan Asset Management . Data is for third quarter 2020


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Proxy Voting (2)

Alibaba

We voted in favour of the election of Maggie Wu, the Chief Financial Officer ofAlibaba, to its board of directors. This went against the recommendation ofISS who argued that shareholders should vote against her election on thebasis that it would further tip the balance of the board against independentdirectors.

There were three reasons we chose to vote in favour. Firstly we have longargued the Alibaba board lacks female representation, with only 1 femaleboard member historically, and so voting against adding a woman to the boardfelt counterproductive. Secondly our analyst Penny has a positive view on howMaggie has performed during her tenure as CFO, especially the greaterdiscipline she has bought to capital allocation at the business. Finally, wespoke to the company and communicated our desire to see moreindependents added to the board over time. To that extent, although we votedin favour of management’s suggested candidate on this occasion we wouldhope to see more progress over time.

Indusind

Indusind Bank is leading private sector lender in India in which we have beenlong term shareholders. During the quarter we voted against thereappointment of a board member and also against amendments to amanagement compensation plan.

The bank has faced some asset quality challenges in the past year,particularly on large ticket loans, and this made us sensitive to questionsrelated to the proper functioning of the board in providing scrutiny. The directorwe voted against sits on more than six public company boards and our view isthat this may limit his bandwidth to provide adequate challenge at Indusind.

Our vote against the compensation plan was on account of it allowing optionsto be exercised below market price as well as the extent of possible dilution.We felt this failed to align adequately with the experience and interests ofminority shareholders.

Penny TuExp: 14/6

Giovanni CarriereExp: 22/6

Human capital

managementGovernance

Human capital



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Proxy Voting (3)

New World Development

A final, and multi-year, engagement example is with Hong Kong propertydeveloper New World Development. In 2019 our China property analyst,Connie Shen, had met the company alongside Jonathan Lowe from ourStewardship team and they communicated our view that the board hadinsufficient female representation. This belief is reflected in our FirstStewardship Pillar of Governance, and is something we view as importantbecause research demonstrates that boards with greater cognitive diversitywill make better decisions. Our belief is that this is a particular issue in theReal Estate sector where important decisions tend to be disproportionatelyconcentrated at the board level, and boardrooms have historically beendisproportionately male. It is for this reason that diversity features in our ESGMateriality question list for the Real Estate industry.

The positive news stemming from the engagement was that this year thecompany added two female directors to the board, a move we were happy tosupport. While this was a pleasing step, we will continue to engage with thecompany on board composition as our internal research still scores it belowpeers on not just female representation but also several additionalGovernance issues.

Connie ShenExp: 9/6

Human capital



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Spotlight on: Material Matters

1. The materiality project must have been a major effort, how did you start to identify what mightbe the material issues for the sub-industries that you cover ?

Defining a concise yet comprehensive list of key issues was a challenge. Having covered the industryfor a number of years I was able to work in collaboration with my consumer colleagues to try andunderstand which ESG issues are likely to be financially material for food retailers in the upcomingyears. It really was a team effort involving a number of debates and email exchanges. I think all theanalysts involved benefited from this exercise as it broadened our understanding of cross-sectorthemes and issues beyond our immediate coverage geographies.

2. When it came to scoring, did you find a wide range of practic es amongst the companies youlook at?

The scoring was a very interesting exercise. In many cases I had a good understanding of the ESGaspects of the companies I cover but in some instances the additional scrutiny and analysis revealedpractices which were not as broadly discussed and transparent. The scores were quite dispersed,ranging from the highest marks for detailed disclosures, flawless track records and incorporating ESGinto strategic targets to the lowest for a history of transgressions and a lack of ESG policies andreporting. Working with the scorecard required a bit of calibration initially but once we mapped out theindustry practices across a wider range of companies and geographies this became a much easiertask.

3. Can you talk about some of the examples of best practice tha t you saw, either in yourcoverage or amongst names your colleagues were working on?

I was particularly impressed by a number of companies within my coverage. One of the stand-outswas Jeronimo Martins (JMT). I awarded JMT the highest scores in a number of categories. JMT notonly maintains high standards overall but is also pro-actively promoting ESG within their supply chainand within the communities they serve. The company has been a market leader in terms of offeringbio / healthy products, reformulating private label products to cut down on salt, fat, sugar andpreservatives, building long term relationships with private label suppliers and pushing for productinnovation.

Environmental criteria are included in JMT’s management decision-making processes and sourcingpolicies emphasize sustainably (e.g. zero net deforestation). Furthermore, JMT is a strong supporterof local communities with a number of social initiatives – large-scale food donations across allgeographies and in Poland supporting low-income senior consumers with pre-paid store cards tosupplement their food budgets.

Piotr DrozdExp: 12/5

Talking Materiality. In this Q&A, EMEA Consumer analyst Piotr Drozdreflects on his journey helping to build the materiality framework for theFood & Convenience Retail sub-industry.


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Spotlight on: Material Matters

4. How has the materiality work shaped your conversations wi th corporates?

I think the materiality framework introduced more structure to the ESG discussions I have beenhaving with the companies I cover. The discussions became more comprehensive and I have beenable to provide more tangible feedback to management teams in terms of the company’s relativeranking within our ESG score-card. One example of this has been my interaction with the Turkishretailer BIM which happens to be one of the weaker-ranked companies in my coverage. During anhour-long discussion focused solely on ESG I have presented our ESG framework, described thecriteria and highlighted the areas where I have ranked BIM poorly. The shortcomings includedinsufficient disclosure in terms of environmental impact and the lack of stated environmental,sourcing, community support and employee diversity polices. From here we can track how thecompany responds to our feedback and recommendations, with the possibility of updating the scoresif tangible progress is made.

5. To what extent do you think this will shape your investment recommendations over time?

ESG covers a broad range of topics but, based on my research and experience, I find that theorganizations which tend to embrace ESG and invest time and resources into this area tend to berewarded with stronger consumer perception and thus superior business duration. Given the largenumber of touch points a consumer-facing business naturally has (customers, employees, suppliers)and the ease of voicing concerns in today’s connected world, ESG standing can have a significantand direct impact. ESG failures may damage brand perception, customer satisfaction levels, theability to attract skilled employees and maintain mutually beneficial supplier relationships – all ofwhich are building blocks of sustainable, long term returns. In this context, the weight of ESGconsiderations is likely to only increase over time.


J.P. MORGAN ASSET MANAGEMENT | 11

A FIDUCIARY FOR 150 YEARS+Commitment to considering the

impact of each decision we make on client portfolios and performance

1,000+ INVESTMENT

PROFESSIONALSengaging with companies globally

INVESTMENT-LED EXPERT-DRIVEN

FOCUSED ON FINANCIAL MATERIALITY

ENGAGING>700 ESG engagements

with companies around the world each year

ACTIVELY VOTING

Across 80 markets around the world

Source: J.P. Morgan Asset Management; data as of December 31, 2019.

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The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and investors may not get back the full amount invested. Past performance and yield are not a reliable indicator of current and future results. There is no guarantee that any forecast made will come to pass. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. This communication is issued in Europe (excluding UK) by JPMorgan Asset Management (Europe) S.à r.l., 6 route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg, R.C.S. Luxembourg B27900, corporate capital EUR 10.000.000. This communication is issued in the UK by JPMorgan Asset Management (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JPCopyright 2020 JPMorgan Chase & Co. All rights reserved.

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