responsible investment and stewardship …our approach to responsible investment and stewardship is...

RESPONSIBLE INVESTMENTAND STEWARDSHIP OUR APPROACH AND IMPLEMENTATION2019

CONTENTS

Introduction from Mark Gregory, chief executive officer Page 4

Introduction from Freddie Woolfe, head of responsible investment and stewardship Page 5

Our approach to responsible investment and stewardship Page 9

Our responsible investment strategy and governance Page10

Integration Page 13

Engagement Page 16

Voting 0

Risk oversight Page 23

Public policy Page 24

Case studies Page 25

European Smaller Companies Page 25

Global Emerging Markets Page 26

Global Equities Page 27

Gold and Silver Page 29

UK Large Cap Page 30

UK Small and Mid-Cap Page 32

Responsible investment philosophies Page 34

European Smaller Companies page 34

Global Emerging Markets Page 36

Global Equities Page 37

Gold and Silver Page 38

UK Large Cap Page 39

UK Small and Mid Cap Page 41

MGI’s Responsible Business Principles Page 43

Cross-referencing with the Principles for Responsible Investment and the UK Stewardship Code Page 44

References Page 45

Additional disclosures required the Shareholder Rights Directive II Page 46

OUR REASON FOR BEINGAs an independent, distinctive and specialised asset management firm, our purpose is to help clients meet their long-term financial objectives and aspirations by investing their assets in a responsible way, and delivering sustainable value to them.

We believe that our clients and their advisers rightly expect us to identify and maintain intelligent and repeatable ways in which to generate investment outcomes that meet their expectations.

We similarly believe that our clients, colleagues, owners and other stakeholders expect us to approach our work in a way that enables us to have a positive impact on society.

We are committed to developing as a business, and to remaining relevant to the needs and expectations of our clients.

This document sets out Merian Global Investors (MGI)’s approach to responsible investment and stewardship over the period between 1 January 2019 to 31 December 2019 in line with the 2020 UK Stewardship Code and the EU Shareholder Rights Directive II, and applies only to our equity investments. Further developing our responsible investment capabilities in fixed income is a key focus for us in 2020.

Morpho Menelaus, 1705By Maria Sibylla Merian (1647-1717)

Plate 53 from Metamorphosis Insectorum © Natural History Museum, London

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RESPONSIBLE INVESTMENT AND STEWARDSHIP OUR APPROACH AND IMPLEMENTATION

INTRODUCTION FROM MARK GREGORY, CHIEF EXECUTIVE OFFICEROver the course of 2019 the board and I agreed a statement of MGI’s purpose, which can be found in the inside cover to this report. This is underpinned by our updated Responsible Business Principles, a copy of which is also in this report towards the end. Together, these two statements stand as a codification of what we exist to do as a business, and how we will behave with respect to our key stakeholders in pursuit of our and their success.

An important element of this relates to investing our clients’ assets in a responsible way. This includes the incorporation of responsible investment and stewardship into our investment processes. Not only do we simply believe this to be the right thing to do, but we know from the increasing number of enquiries from clients and prospective clients that these issues are rapidly rising up their agenda.

We are committed to building a business that is relevant, and able to respond, to our clients’ requirements both today and tomorrow. For this reason, since our formation in July 2018 we have increased our resourcing to responsible investment and stewardship, and implemented a strategic roadmap best to ensure that we develop our capabilities. Our purpose and renewed Responsible Business Principles underpin this from a broader strategic and cultural perspective, and allow us to challenge and debate our behaviours and decision-making accordingly. At a company level a focus for 2020 will be on ensuring these are fully embedded across the business.

MGI’s business model and investment approach is based on the view that our talented managers will achieve strong returns for clients if they have the appropriate freedom to use their own proven processes. We do not impose a single house style or view on our investment teams, but instead allow them a high degree of independence whilst ensuring that they work within the company’s robust risk management and compliance framework. This plays an important part in delivering the long-term investment outcomes that our clients expect as part of our purpose.

Our approach to responsible investment and stewardship is therefore tailored to each of our investment teams. This aims to ensure that they are able to implement it in a way that is most relevant and value-adding to their strategies and processes rather than apply a one-size-fits-all approach that might produce nice soundbites but is likely to miss the mark across a diverse set of investment styles. To provide transparency on the approaches taken by the different investment teams we have set out publicly each of the equity teams’ responsible investment philosophies. Equally, as an important counter-balance we also maintain ESG monitoring through the investment risk function as well, which provides independent governance and oversight of portfolio and house exposures.

This document offers insights into how we implement responsible investment and stewardship and provides examples of this in practice. Our approach and practices have developed significantly over the last couple of years and will continue to do so; we know that as our clients’ interest in the topic continues to grow our capabilities need to continue to be able to meet and exceed these expectations. If you have any feedback on this report or our approach, the team would be very willing to hear from you. You can contact them at [email protected].

INTRODUCTION FROM FREDDIE WOOLFE, HEAD OF RESPONSIBLE INVESTMENT AND STEWARDSHIPAs we enter a new decade, it is important to reflect on the progress made over the last ten years in responsible investment and sustainability more generally, as well as the major developments required over the next ten.

THE PREVIOUS DECADEBy any measure, responsible investment can no longer be considered a niche activity. Between 2010 and 2019 the UN-backed Principles for Responsible Investment (PRI) has grown from 734 members with assets of US$21 trillion to nearly 2,400 members owning and managing assets of US$86 trillion1. Of this number around US$66tr is attributed to asset managers, suggesting that up to 85% of global2 assets under management have signed up to, among other things, integrate environmental, social and governance (ESG) issues into investment analysis and engage with companies and other investments on their ESG performance. The 2019 PRI conference had 1,700 attendees, making it their largest conference ever.

Regulation is a significant driver of this. Following the financial crisis the UK introduced the inaugural UK Stewardship Code in 2010 to enhance investor engagement with companies and transparency around how investors exercise their ownership responsibilities. The Code has subsequently been updated, with the most recent revision published in 2019 which continues to push the investment industry with additional expectations around issues such as ESG integration. Following the UK’s lead there are now 21 stewardship codes globally3. Indeed, in the world’s 50 largest economies there are over 500 policy instruments encouraging or requiring investors to consider the key aspects of long-term value creation, including ESG4.

Client interest has continued to grow significantly as well. Willis Towers Watson found5 assets allocated to ESG principles grew by 17.8% between 2017 and 2018 at the world’s top 500 asset managers, compared with a total asset growth rate of -3%. Schroders found in its Global Investor Study6 that 76% of those surveyed said that sustainable investing has become more important to them over the last five years, with Morgan Stanley suggesting7 that in the US the millennial generation is two times more likely than the overall investor group to invest with social and environmental goals. Given that UBS estimates8 this generation will be worth US$24 trillion in 2020, this is a major signal of increasing interest in responsible investment from current and future clients that investors simply cannot ignore. However, the demand pull is not only coming from the retail sector; 84% of asset owners already pursue or are considering the pursuit of responsible investment integration into their processes, with 60% having started doing so in just the last five years according to Morgan Stanley9.

International policy co-ordination has been key in creating frameworks for creating more sustainable economies and societies. The Paris Agreement10, to keep the global temperature increase to well below two degrees above pre-industrial levels, was negotiated and adopted in 2015 under the auspices of the United Nations (UN) Framework Convention on Climate Change and has set the backdrop for ongoing national and international discussions and regulation on climate change. While the Paris Agreement now has 187 members party to it, in 2019 the US – responsible for 15% of global emissions11 - withdrew from the accord. All UN member states also adopted the Sustainable Development Goals12 (SDGs) in 2015, which provide “a shared blueprint for peace and prosperity for people and the planet”, supported by 17 wide-reaching goals.

Ambitious and potentially game changing targets are starting to be set. In late 2018 the Intergovernmental Panel on Climate Change (IPCC) set out its additional research on the benefits of limiting temperature increases to 1.5 degrees rather than 2 degrees. The significant reduction in impact has helped move the policy debate to increasingly focus on 1.5 degrees as the end goal. In 2019, 87 leading companies with a market value of over US$2.3 trillion and emissions equivalent to 73 coal-fired power plants announced that they would set targets for their entire value chain to limit global temperature increase to 1.5 degrees and achieve net-zero emissions by 205013. In the same year the UK government signed into law a target to reduce the country’s greenhouse gas emissions to net zero by 205014 and EU leaders too agreed a bloc-wide deal to reach the same target. Key challenges remain about the required policy developments in the world’s largest emitting countries, including the US, China and India.

THE NEXT TEN YEARSHowever, there is much, much further to go. 2020 marks the beginning of a decade with large sustainability expectations and major changes across industries and in consumer behaviour required to achieve them. This implies both significant risks for companies that are likely to be impacted by additional costs and regulation but also opportunities for those able to capture new demand by offering innovative and societally useful products and services.

On climate change, this next decade is crucial in formulating the global policies required to steer us on course to achieve the Paris Agreement. The PRI’s Inevitable Policy Response (IPR)15 forecasts the potential regulatory landscape, highlighting an expected acceleration in policy announcements between 2023 and 2025 following the global stock take of carbon emissions and the subsequent round of global climate pledges. The significance of the required policy response required can be seen in table 1. Current climate-related policies, estimated to lead to around three degrees warming16, will result in global emissions of 60 gigatonnes of CO2 in 2030, overshooting the level required for a two degrees trajectory by 46%.

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TABLE 1: PROJECTED GLOBAL EMISSIONS IN 2030 COMPARED WITH REQUIRED EMISSIONS TO REACH 1.5 DEGREES

2030 global emissions (GtCO2e)

Overshoot from 2 degrees scenario (GtCO2e)

Reduction required to reach 2 degree scenario

Overshoot from 1.5 degrees scenario (GtCO2e)

Reduction required to reach 1.5 degree scenario

Current policy 60 19 32% 35 58%

Conditional NDCs 54 13 24% 29 54%

Below 2 degrees 41 0 0% 16 39%

Below 1.8 degrees 35 10 29%

Below 1.5 degrees in 2100 25 0 0%

Source: adapted from UN Environment Programme17

Some of these policies will need to relate to pricing carbon, so as to cause emitters to pay for the costs currently borne by society. Carbon pricing now covers 15% of the world’s emissions18. The largest scheme is the EU’s Emissions Trading Scheme (ETS) – while prices have been increasing over the last two years they are still some way off the US$63 per tonne of carbon in developed markets and US$43 per tonne in developing markets required by 2025 in key sectors according to the International Energy Agency’s World Energy Outlook.

CHART 1: EU ETS PRICE (€)

Source: Bloomberg, as at 9 January 2020.

There was much hope that the 25th Conference of Parties (COP) held in Madrid in late 2019 would result in an agreement on global carbon market rules, however this was not forthcoming due to lack of agreement on contentious issues including carry-over of credits from previous schemes and double-counting. Perhaps unsurprisingly, there was significant push back from high emitters. The clear challenge is that the longer the policy response is delayed the more drastic it will need to be in the future to stick to the Paris ambition.

From an investment perspective this lack of progress creates more uncertainty and risk around costs and demand changes. Research by BNY Mellon19 found that 93% of institutional investors it surveyed, with a total of US$12.75 trillion in assets under management, see climate change as an investment risk that is yet to be priced in by financial markets. The IPR forecasts20 that US$1.6trn-US$2.3trn of value is permanently at risk for the constituents of the MSCI ACWI Index by 2025. Slow progress around policy support also means that the new technologies and business models that will help reach the Paris Agreement are inherently risker in the eyes of the capital markets, meaning that necessary large scale funding to what should be some exciting investment opportunities is likely to be delayed.

More broadly, the Sustainable Development Goals (SDGs) provide a clear framework for thinking about a broader set of sustainability topics that will require policy as well as significant funding to achieve. They help understand how economic growth can be attained in a way that looks after our environment and global society. With only ten years for their achievement a huge amount of work remains to be done; for the SDGs to be achieved by 2030 an additional US$2-US$4 trillion a year will be required, on top of an already earmarked US$3 trillion21. However, achieving the Goals has been projected to open up US$12 trillion in market opportunities annually by 2030, generating up to 380 million jobs22. This is a clear demonstration of the real business opportunities for those serious in trying to contribute to the global sustainability agenda.

We strongly expect client interest to continue to build in responsible investment, and that ultimately it will become a base expectation of investment managers. The trends in the institutional channel have been clear for a number of years however the increasing amount of wholesale channel enquiries, and their rapidly evolving sophistication, demonstrates that the channel is quickly catching up. Research by the Global Sustainable Investment Alliance23 shows that of the total global assets classified as sustainable 25% are held by retail investors now, up from 11% in 2012. This is reflective of an evolving attitude towards sustainability, particularly among the younger generations although by no means entirely driven by them, and an increasing desire to see these beliefs reflected in how pensions and savings are invested.

New ESG fund launches will also likely continue apace – in 2019 alone 873 new sustainable funds were launched globally. We see this as a positive trend towards addressing clear market needs, however we caution there is a requirement to be transparent on the intentionality, capability and ambitions of such products, and a need to avoid greenwashing; in late 2019 the UK’s Financial Conduct Authority (FCA) remarked of sustainably badged investment products in the UK “on the face of it, some of these do not appear to have materially different exposures to products that do not have such a label.”24

CHART 2: GLOBAL ESG FUND LAUNCHES

Source: Morningstar Direct, as at 10 January 2020.

OUR PROGRESS OVER 2019During 2019 we have been focused on enhancing our investment teams’ access to sustainability data in a systematic way such that it can be most useful for an investment process. We are clear that if this information is to be useful we need to ensure that the analysis is done by us, rather than relying on other people’s views. This has involved the development and roll-out to our fundamental equities investment teams of our proprietary sustainability and accountability analysis framework that we call AIM. The data behind this is now accessible through our Bloomberg terminals, meaning that it is readily accessible at any time. We explain AIM in more detail later in the report under the section “Integration”.

While AIM assists us to consider these topics in the context of our investment processes it also allows us to more closely monitor our portfolio holdings. This has led to the development of, with each investment team, a focused number of engagement targets. This process has, with one exception, been led by the investment teams, incorporating their intimate knowledge of the fundamentals of the investee companies. This means that all the insights from engagement can be brought back directly to the investment process and integrated fully into our investment cases. For some examples of this in action, see the section “Case studies”.

Following these updates we have taken the opportunity to update each equity team’s responsible investment philosophy documents to be more explicit on how they incorporate the five pillars of our approach. For the first time we have published these documents. You will find copies of them in the section “Responsible Investment Philosophies”; we expect these documents to evolve as our capabilities continue to develop over time.

We have also enhanced our independent, second line of defence risk function’s oversight of ESG performance. These updates are discussed in the section “Risk oversight”.

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OUR FOCUS FOR THE YEAR AHEADAs described, over 2019 most of our work has been with our equities investment teams, and this report therefore only covers our approach for them. This is for two main reasons: firstly, because at the market level integration and engagement in equities is more developed and customary than in fixed income, and secondly because data and research coverage tends to be based on equity indices. However, during 2020 we will be taking a similar approach to our fixed income teams as we have done with our equities teams over 2019. This will mean that by the end of 2020 we hope to have fixed income investment team coverage with updated responsible investment philosophies, taking advantage of our improved processes and assessments. We will also continue our work to embed and develop our processes within our equity products.

Our other development priority for responsible investment over the current year relates to climate change and seeking to enhance our analysis and response to the topic. We know that this is a key issue for our clients and, as highlighted earlier, is a topic that at a market level requires more understanding. Given the amount of capital expenditure required for some high carbon companies to transition, there is significant risk, if poorly applied, of value destruction – it is possible that running for cash and returning value to investors is the best strategic option for some of these companies. There are also some big opportunities if done well – the Danish company Ørsted, which sold all its upstream oil and gas assets in 2017 in favour of becoming a renewable energy business, has significantly outperformed a European benchmark of oil and gas stocks since 2017.

CHART 3: ØRSTED SHARE PRICE AND THE STOXX EUROPE OIL AND GAS INDEX

Source: Bloomberg, as at 10 January 2020. Rebased to 100.

We cannot pretend that this work is going to be easy, not least given the significant uncertainty involved, however we do need to be able to have a framework for helping us answer some fundamental strategic questions about whether certain sectors and their constituents will likely be able to contribute to or even survive the low carbon transition. Our integrated approach, working with portfolio managers and analysts, should best enable us to incorporate our response across our investment processes and stewardship work, including engagement, voting and capital allocation.

This will be another busy year for us as we continue to build and grow our responsible investment capabilities. As always, we would be very pleased to hear any feedback on this report or our activities. You can contact us at [email protected].

OUR APPROACH TO RESPONSIBLE INVESTMENT AND STEWARDSHIPFor responsible investment to be most effective it must contribute positively to our investment processes and outcomes for clients. Our approach therefore seeks to design our capabilities to be best aligned with our various investment strategies, recognising that they will each have their own requirements according to how and where they invest.

We split our approach to responsible investment into five core pillars. Some of these are common across all our strategies, such as voting. Others will naturally need to flex depending on the investment style; for example, our approach to engagement prioritisation will naturally differ between our some of our systematic strategies and our lower-turnover, long-only investment teams. More detail on the investment teams’ different approaches can be found in their responsible investment philosophy documents which can be found in the Responsible investment philosophies section on page 34 of this report.

THE FIVE PILLARS:Integration: through the development of proprietary tools and research we aim to gain value-adding information and perspectives on the material environmental, social and governance topics for companies and sectors. This will help us better assess risks and identify opportunities, and should provide us with an investment edge over the market.

Engagement: we recognise our responsibility as investors to promote and protect long-term value creation, and to hold the boards of the companies in which we invest accountable for performance. This extends beyond governance to all aspects of a company’s strategy and operations, including its environmental and social performance.

Voting: we exercise our voting rights at every opportunity where not hindered by legal, trading or process issues to re-inforce our engagement with companies, protect shareholder rights and promote good corporate governance.

Risk oversight: a key aspect of our approach is developing independent oversight of the sustainability and accountability characteristics of our portfolios through the investment risk function. This ensures that while the investment teams are responsible for the construction of their portfolios, we have a formal governance process in place to monitor and query exposure to environmental, social and governance risks.

Public policy: where we identify systemic issues that affect the sustainability of the markets in which we invest we will, either directly or through membership associations, seek to influence policy to address those challenges.

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Ørsted Stoxx Europe 600 Oil & Gas

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OUR RESPONSIBLE INVESTMENT STRATEGY AND GOVERNANCEIn order to deliver on our purpose we are developing an investment-led, value based approach to responsible investment and stewardship. This has big implications for the choices we make about how we resource responsible investment and the governance structures necessary to implement it.

So as to guide our responsible investment strategy and help us make important choices about its implementation, we have developed four fundamental principles that underpin our approach. They are:

1. Add value for clients: responsible investment must help us make better investment decisions on behalf of our clients, address particular client needs, or ideally both.

2. Quality over quantity: we will focus on the areas where we can have the most impact and that we deem to be most material to our investments and client interests.

3. Authenticity: we will be honest and genuine about our activities, including any successes and challenges faced whilst implementing our responsible investment strategy.

4. Practice what we preach: in line with our responsible business principles, we will endeavour to embody the behaviours that we expect of companies where practicable.

An essential part of being able to deliver on the first principle is endeavouring to understand the views and requirements of our clients across asset classes. As at the end of 2019 our end client base was around 90% retail, our clients being mostly wholesale wealth platforms, global banks, third party platforms and larger advisory firms, with the remainder institutional funds. Our assets under management are broadly split 73% in equities, 18% in absolute return strategies and 9% in fixed income, invested globally.

A number of our wholesale and institutional clients very kindly gave their time to discuss their current and future responsible investment and stewardship needs and expectations over 2018 and 2019 as part of a dedicated project we ran to inform our strategy. We are also seeing a large increase in the number of questions about the topics in regular client and prospective client meetings and enquiries, as well as ad hoc expressions of interests to both our institutional and wholesale commercial teams. This input is hugely helpful in helping us develop our responsible investment strategy as we want to ensure that our work is focused on what we know, rather than assume, matters for our clients. In particular, climate change is an increasingly recurring theme that we are hearing across both institutional and wholesale channels, and as such will be a key focus for our work in 2020.

RESOURCINGINTERNAL RESOURCINGWe are clear that for responsible investment and stewardship to be most effective it must contribute positively to our investment processes and outcomes for our clients. We cannot do this properly by building a large team of responsible investment professionals that has little interaction with the investment teams or whose output has minimal impact on the decision-making processes. We certainly do not want to design a structure whereby the stewardship team and the investment teams could present opposing views to a company. We have a small, highly experienced team of in-house responsible investment specialists to set and help implement the overall responsible investment and stewardship strategy. However, as the responsibility for the construction of our portfolios rests with our portfolio managers the implementation of responsible investment ultimately lies with them as well.

For this reason, each investment team at MGI has its own responsible investment philosophy aligned with its investment style. The considerations included in these philosophies as well as ways in which they can be implemented meaningfully are guided and influenced by our experienced responsible investment team. The combination of this dedicated in-house expertise with MGI’s investment expertise is our platform for delivering our ambition of excellence in responsible investment. We want to leverage the huge investment knowledge and expertise of our investment teams, guided by our responsible investment specialists, to deliver a fully integrated approach to responsible investment and stewardship that is entirely in line with the funds’ objectives for their clients. Copies of the investment teams’ responsible investment philosophies can be found in the section “Responsible investment philosophies”.

An important element of our approach to responsible investment is also having ESG capability within our investment risk department. This provides an independent structure that allows us to challenge the investment process through a formalised governance process. More detail on this can be found in the section “Risk oversight” on page 23 of this report.

SERVICE PROVIDERSWe also rely on a number of external service providers for the delivery of our responsible investment strategy, as we are able to benefit from their scale and knowledge. The areas for which we require significant external support in responsible investment and stewardship relate to voting and ESG data and research in order to allow us to centre in on those areas where we need to focus our expertise and analysis. We are also increasingly reliant on IT solutions as we embed our proprietary sustainability and accountability analysis framework (see the section “Integration” on page 13) into the investment teams’ day to day tools.

All of these service providers fall under our supplier management programme, which has policies and governance processes for how we should oversee the provision of their services, including regular reviews. Included in this we seek to understand the audit processes that our responsible investment and stewardship service providers have been through to ensure that they have operated in line with their own controls and expectations and that any specifics tailored to our requirements have been delivered properly, such as the implementation of our custom voting policy.

In addition, outside of this formal process we are in regular contact with both our voting service and ESG data and research providers to provide regular feedback in the course of our use of their products. Where we do see errors, omissions or simply have different points of view we regularly feed these back as we see it in both parties’ interests to work together in order to ensure that we can get the best service and research possible. We see this partnership model as key to being able to progress and develop our own responsible investment capabilities; we have had a number of substantive discussions with our major service providers over the year and are happy with their responses and any subsequent changes that they have made.

GOVERNANCEOVERALL RESPONSIBILITYThe responsible investment and stewardship strategy has been approved and signed off by our Executive Committee, and the head of responsible investment and stewardship provides at least annual updates to that committee to allow for challenge and any changes to the strategy to be fully discussed and approved. On a less formal basis, the head of responsible investment and stewardship meets regularly with our chief executive officer and group chair to update them on progress and discuss how our approach to responsible investment is aligned with the wider company strategy, culture, purpose and values.

ENTERPRISE RISK OVERSIGHTOperational risks in relation to responsible investment and stewardship processes and controls are assessed on a semi-annual basis as part of MGI’s Risk Control Self-Assessment process which forms part of the boarder enterprise and operational risk management framework. This ensures a regular review of our policies, processes and controls, and results in an assessment of their effectiveness as well as the potential impact of their failure which is then independently challenged by our enterprise risk management team. All material risks to the business are consolidated and discussed by our Executive Committee and our internal Risk and Governance Committee to determine a top risk view of our business. Currently, responsible investment and stewardship forms part of this top risk assessment and is reported on at the quarterly risk update to the Risk and Governance Committee and also to the relevant MGI boards including at Group Audit and Risk Committee for oversight and debate.

The development and improvement of our responsible investment and stewardship practices over the year has meant that we have been able to move some processes and controls onto the investment teams over the period in order to better align responsibilities of investment decisions with the implementation of the responsible investment strategy. We have also been in a position to upgrade the effectiveness rating of several controls over the period, mainly due to the continued roll-out of our integration tools.

As described previously, a key pillar of our approach is independent investment risk oversight of our portfolios. Please see the section “Risk oversight” for more information.

REMUNERATIONWe understand the importance of investing alongside our clients to align our long-term interests. A significant portion of our fund managers’ remuneration is invested directly in their own and others’ funds. Given that our strategy is to develop an investment-led approach to responsible investment and stewardship this should capture many of its aspects in the long-run. However, we do not currently have explicit metrics in our performance appraisals that relate to the implementation of responsible investment and stewardship, and therefore this does not currently impact remuneration.

EXCLUSIONSWhile we do not seek to impose house views on the investment teams, we do maintain a policy that we will not knowingly invest in the securities of companies involved in the manufacture, development or trade of anti-personnel mines or cluster munitions, a copy of which can be found on our website*. This policy is implemented by our compliance department through our trade processing systems so as to automatically block the purchase of securities. This is based on a list provided to us on a quarterly basis by an independent third party data provider with expertise in identifying relevant companies. Investment teams may choose to exclude investment in additional industries and products, the details of which can be found in their responsible investment philosophies on page 34 of this document.

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CONFLICTS OF INTERESTIt is possible that actual or perceived conflicts of interest could arise in the implementation of our responsible investment and stewardship activity. These could cause us to act in a different way than we otherwise would to the detriment of our clients, for example by not voting against resolutions that contravene our policy or choosing not to engage on a material issue. Areas of potential conflict include when:

• We have a commercial relationship with an investee company• An MGI employee or director is a director of an investee company • An investee company is also a client of ours

We have a number of processes to ensure that these conflicts do not impact the rigour of our approach to executing our responsible investment and stewardship activities on behalf of all our clients.

We maintain a watch list on our voting platform of our major suppliers and clients, as well as those companies where one of our colleagues is also a board member. In these instances, for routine voting items we default the vote to our voting service provider’s assessment of how our policy should be applied. If they are unable to apply our policy directly on any resolution we revert to their standard recommendation in order to retain the independence of the vote. Where the resolution is of a transactional nature – which naturally requires a more investment-led rather than governance view – the vote is escalated to the head of responsible investment and compliance advisory to ensure no conflicts exist, and a secondary review will be conducted by a portfolio manager from a different investment team to feed in to provide an additional investment lens.

To manage conflicts of interest in engagement, our regular portfolio monitoring for engagement target identification makes evident where sustainability and accountability issues might exist that require additional research and consideration into the investment case and valuation. We also maintain independent oversight of these issues through our investment risk function. For more information please see the sections “Engagement” (page 16) and “Risk oversight” (page 23). As an additional measure, our portfolio managers are CF30 registered and are therefore obligated to act with integrity in accordance with APER requirements. Engagement will be led by the head of responsible investment and stewardship or another investment colleague should a portfolio manager be conflicted to such an extent that it would be inappropriate for them to undertake the related activities.

ASSURANCEIn 2016 an internal audit of our stewardship activity was performed with a particular focus on engagement and voting processes including in the context of the UK Stewardship Code. An internal review of our stewardship activity has subsequently been undertaken periodically, with the need for and benefit of an external audit being considered annually. We have not undertaken an audit over the period, as our processes have been developing quickly and constantly. Our enterprise risk oversight also provides a helpful and regular review of our activities and progress against key action points to improve the effectiveness of our controls. However, we can see significant benefit in gaining assurance over our processes when they are more bedded down so will actively keep this under review.

* https://www.merian.com/global/wp-content/uploads/2018/08/controversial-weapons-policy.pdf

INTEGRATIONIntegration describes the endeavour to take into account responsible investment and stewardship topics as part of the investment process. This is the aspect that requires the most adaptation and flexibility according to our various investment approaches in order to best identify which issues will be material and over which timeframes, as well how they should best be considered in the context of adding value for our clients.

ACCOUNTABILITY AND INTEGRATION METHODOLOGY (AIM)We cannot rely only on external ratings or raw data to provide us with an accurate and investment-relevant view of a company’s environmental, social and governance (ESG) profile. If the information is to help us make better decisions it must enable us to take our own views, informed by the investment process, rather than depend solely on an external party who does not have the same responsibilities to our clients as we do and is not an investor. While we rely on several service providers for responsible investment and stewardship, and provide regular feedback to them on our requirements with a view to enhancing the service we receive, we do not absolve ourselves of the ultimate responsibility for its implementation. For this reason we have developed a proprietary sustainability and accountability analysis framework, which we call AIM. Over 2019 its roll-out has been a major priority; we now have this up and running for all our fundamental equities teams, and during 2020 implementing AIM for our fixed income capabilities is a key focus. Please refer to the investment teams’ responsible investment and stewardship philosophies on page 34 of this report for more detail on their various approaches to how AIM has been incorporated into their processes.

In order to categorise the key topics to address, our approach looks at five key aspects of how these issues could become material for a company. The relevance of each topic for a company will depend on a number of variables, including the industry and the geographies in which it operates, as well as international laws and conventions.

Environmental impact: the company’s environmental externalities such as carbon emissions, and environmental resource usage such as water extraction.

Stakeholder relations: how the company manages its relationships with its key stakeholders, such as employees and customers.

Business continuity: issues that could have a direct impact on a company’s ability to operate, such as cyber resilience or business ethics issues. This also includes the future opportunities in certain sectors particularly challenged by sustainability issues, in particular revenues from low carbon/clean products and services.

Licence to operate: topics related to a company’s relationship with wider society which if negative would reduce its customer base or resulting in regulation and fines. For example, this would include supply chain oversight issues and aggressive tax planning. On the positive side it looks at revenues from business models that extend access to important products such as medicines to the world’s poorest.

Accountability: topics that assess how likely it is that management runs the company in the interests of shareholders, such as accounting, board composition and executive compensation.

Beneath these five pillars are 18 high level themes and 46 key issues across 157 sub-industry classifications under which numerous ESG data points sit. AIM uses externally sourced ESG data and has been built from the bottom up. The precise data points used differ by investment team so as best to capture the issues that are important to them. For example, some regions will be more exposed to certain issues than others either due to geographical nuances or sector concentrations. Likewise, should a fund’s investible universe be restricted to certain sectors we are able to be more precise about the data points that need to be assessed.

Towards the end of 2019 we started implementing a major enhancement to our ability to incorporate AIM into our daily investment processes by making our data and proprietary scores available on our Bloomberg terminals, significantly improving its accessibility across portfolio holdings and investment candidates. We expect this process to be complete in early 2020.

However, data alone cannot help us reach investment-relevant conclusions for our fundamentals processes that are based on deep knowledge of the companies in which we invest. In order to form more informed views we can follow a six-step process to take us from what are inaccurate or incomplete data as well as subjective opinions to an investment-relevant discussion.

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OUR SIX-STEP AIM PROCESS

1 - What does the data tell us

Where does the company lie on the spectum of leader to laggard?

2 - Issue analysis

Is the data correct? Is performance improving or deteriorating? Is the issue material to the investment case or for clients?

3 - What does our analysis tell us?

What has our analysis told us additionally? Does the issue require further work from us or can we dismiss it?

4 - How will the issue internalise at the company?

How will the issue impact the business? Is the matter operational, financial, reputational or demand-based?

5 - What is our ability to influence?

Can we realistically engage? If so, over what timeframes do we need to see improvements? What will we need to do if this doesn’t happen?

6 - How should these issues impact our investment?

Is the issue reconcilable with valuation? If so, is it already in the price? If not, what adjustment should we make to the discount rate, warranted discount/premium to peers etc to account for it?

In the end, following these steps provides us with a more complete picture of the issues and opportunities, as well as a view on how best to respond to the information through engagement and valuation. Our experienced subject matter experts provide additional context to the data and help our investment teams understand the full implications of them and debate the most appropriate response.

WHAT WE MEAN BY MATERIALITYWhen considering whether a topic is important, or material, we need to take a view on a range of issues in order to help us centre in on which companies and which issues to prioritise. There are two important considerations; firstly, the importance of the issue itself and secondly the importance of our investment. Inevitably our consideration of materiality is a balance of these.

MATERIALITY OF THE ISSUETo a company: through our investment processes we seek to understand the extent to which the issues we consider are relevant to the company’s performance, operations, financials and, ultimately, value. For example, concerns about occupational health and safety are more likely to be heightened at a company operating in the extractives sector than it would be at a bank. AIM helps us to cover issues of sustainability and accountability more systematically; however, for this assessment to be effective it requires a strong knowledge of many aspects of the business rather than generic sector or industry research which naturally requires the input of our portfolio managers and analysts in conjunction with specialist input. To clients: while certain issues might not trigger our threshold of materiality to the company they might still be important issues for our clients, and they would therefore expect us to consider them. We therefore ensure that we keep client interest front of mind when determining the companies and topics to pursue in our responsible investment and stewardship activities. As mentioned earlier, we have noted a significant increase in client interest in climate change over the last couple of years and so the topic is a key focus for us in 2020.

MATERIALITY OF HOLDINGSTo the company: where we hold large positions of a company’s equity we are likely to have more influence, and our stewardship activities are more likely to be successful.

To the investment team: irrespective of the value of the holding we will naturally focus our stewardship on those companies that represent a larger part of the investment strategies’ overall value, given the potential impact of the risks and opportunities to our clients in that strategy.

To the house: as multiple investment teams might hold shares in the same company, where we engage and vote we aggregate our holdings to represent a unified voice. We might therefore end up focusing our stewardship activities on a company that is a relatively small part of one fund’s value as a result of it being more material at a house level.

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ENGAGEMENTAn important part of our responsibilities as investors is taking an active ownership approach to the companies we invest in where relevant to our different investment strategies. By building long-term relationships with the companies we invest in we should be able to spot any issues earlier and, based on an established relationship of trust, be able to influence and push for constructive change. Please see the section “Case Studies” on page 25 for detailed examples of our engagements.

Our fundamental equities teams meet hundreds of companies a year to discuss a wide range of issues, including those related to responsible investment related topics such as corporate governance, health and safety performance and labour relations. Additionally, our dedicated responsible investment resource joins meetings with companies where particular subject matter expertise is required for engagement. Due to the nature of our systematic investment processes, in general we do not meet with their portfolio holdings unless they are also held by another investment team. However, we do seek to engage with a small number of companies held by those strategies where we can be clearer that we will be invested for a sufficiently long period to warrant engagement and where we identify issues that we need to address. For more details of each team’s specific approach, please see the section “Responsible Investment Philosophies” on page 34.

HOW WE IDENTIFY COMPANIES TO ENGAGE WITH AND SET OBJECTIVESMonitoring our investments is a core aspect of our work, not least to assess whether to add to, maintain or sell the holding. Our monitoring includes an on-going assessment of companies’ financial and operational performance, the quality and credibility of strategy, the markets and economies in which companies operate, the effectiveness of a company’s leadership, financial sustainability, the quality of a company’s reporting and governance processes, as well as environmental and social issues and the ethical behaviour of the company and membership of the leadership team.

How this works precisely depends on the investment style of the fund. A systematic strategy will use regular data from a wide range of sources as its key inputs, whereas a fundamental equity fund will also gather considerable amounts of information from discussions with company management and boards, as well as brokers and analysts, sector experts and others with valuable knowledge. AGMs provide an opportunity for an additional annual governance health check of our investee companies.

The roll-out of AIM during 2019 to our equities teams has enhanced our ability to more incisive about the material issues at specific companies in our portfolios. Over the year we have used AIM, in conjunction with our deep knowledge of our investee companies from other sources, to help us prioritise a small number of companies by each equities investment team for intensive engagement where we see specific issues that we believe we can address through interactions with these companies. This process allows us to be more specific about the strategy to achieve our goals, as well as what we might need to do should we not see the progress we expect.

Any engagement objectives we set need to be realistic. It is important to recognise that engagement is not always feasible or a pragmatic response. For example, a company might simply refuse to engage with us or have governance arrangements that deliberately reduce the potential influence of outside investors. Alternatively, a company might operate in a sector where the issues we would want to address are so intimately related to its product or operations that no realistic alternative approaches exist. In these instances the more appropriate response is usually to revisit the investment case itself in order to be clear that we can reconcile the issues at that level rather that use engagement as a way of avoiding tougher, but more appropriate, conversations.

Importantly, for our fundamental equities teams the prioritisation process must be undertaken in conjunction with the portfolio managers and analysts to ensure that our investment views and engagement messaging are consistent. It also means that any consequences of the can be fully considered in the totality of the investment outlook and valuation. For the systematic strategies this activity is undertaken by our responsible investment and stewardship resources.

HOW WE ENGAGE WITH COMPANIESOur primary method of engagement with companies is through our regular investment meetings throughout the course of the year. These will be done at all levels, from chair to executive management to investor relations. Our responsible investment resources will participate in these meetings where necessary, however they are almost always either run by or done in conjunction with relevant portfolio managers and analysts in order to ensure that the investment and engagement views are consistent and that insights from our stewardship activities are fully reflected in the broader investment process.

Meetings with investor relations and management permit us to assess the valuation of companies but are also used to question companies on strategy, performance, financial management and sustainability. We also meet with board chairs and board committee chairs with whom we may discuss any issue relating to the business, but usually this includes discussion on the company’s long-term performance and strategy, operations, and key environmental, social and governance topics. Additionally, where we have specific concerns that require specialist expertise, such as certain sustainability topics, we might need to meet in-house experts to understand performance better.

Where we have identified concerns that we need to address but these regular meetings do not sufficiently allay our concerns or progress our objectives, we will consider setting out a more formal engagement programme with the company, being clear on our expectations of change and timeframes to achieve that change. This tends to involve escalation to executives and the board, and where necessary formally

in writing to the chair. This usually opens further channels of communication, allowing us to progress our engagement as intended.Engagement can often be a long-term process; however there will be times where dialogue simply is not producing the change that we hope for. In this instance, and where we do not see the possibility for further progress absent some change in leadership, we will push for individual accountability for the issues including voting against director elections at shareholder meetings. Collaborative engagement, as discussed further in this section, can also be a helpful tool.

We much prefer that all discussions with companies should take place confidentially as part of building and maintaining a relationship of trust that is so important for effective stewardship. However, on rare occasions we might also decide to make our concerns public as a way of highlighting the extent of our, and potentially others’, concerns as a lever for change.

Our ultimate response, should we not see the change forthcoming that we believe necessary, is to sell our holding in the company.

BEING TAKEN INSIDEIn the course of our monitoring and engagement with company management we are willing to become insiders if justified in the circumstances: it is our practice that the fund managers responsible for the relevant shareholding will determine if we can be taken inside, in accordance with our controls framework. We cannot agree to be taken inside without a clear deadline for insider status ending: it is not in the interests of our clients to be inside for an indefinite term.

COLLABORATING WITH OTHER SHAREHOLDERSWorking collaboratively with other investors can significantly increase the level of influence over companies and is a very useful escalation technique. The decision to work collaboratively is taken on a case by case basis, with considerations including the extent of our investment exposure, the status and progress of our current engagement and the interests and ambitions of the other participating shareholders. In all such conversations, we need to be careful to avoid inadvertently creating concert parties or exchanging inside information.

We are members of several formal and informal groups which can result in collaboration with other investors, including:

• UK Investor Forum• UK Corporate Governance Forum• The Institutional Investors Group on Climate Change and the Climate Action 100+ initiative• Investor Group of the 30% Club• UN-backed Principles for Responsible Investment

Over the period we have proposed and supported several engagements to the Investor Forum, and continue to be impressed with the results it achieves. It has proved a particularly effective way of triangulating some of the messages we have heard through our own engagements with companies, and has been very helpful in demonstrating a broader level of market concerns to companies than we can alone. The Investor Forum’s review of the great work it has done over 2019 can be found on its website*.

We have also been pleased to join the engagement groups for two large companies on the target list of Climate Action 100+, which presses some of the world’s largest carbon emitters to set strategies for decarbonisation. We also have broader engagements with these companies, however the focussed engagement work through this group on climate change allows for a multi-faceted approach to tackling the issue, including at various levels within the companies. Through this group we also contributed our shareholding in BP to submitting a shareholder proposal on the company’s low carbon transition strategy at the 2019 AGM which received greater than 99% investor support, as well as the board’s recommendation of support.

The influence we can have through these initiatives widely exceeds that which we could have on our own at some of these companies, and we are very grateful to the organisers and other participants for enabling this.

ENGAGEMENT TOPICS OVER THE YEAROver the period, in order to provide more detail on the topics that are important for us to discuss with companies, we have started recording more detail on the discussions we have with the companies in which we invest. While this data does not capture every interaction we have with companies, it provides a representative sample based on major meetings we have held with investee companies across the house. Enhancing our data capture to provide a more complete sample is a priority for 2020. * https://www.investorforum.org.uk/annual-review-2019/

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STRATEGY, FINANCE AND OPERATIONS

ACCOUNTABILITY

ENVIRONMENTAL IMPACT

STAKEHOLDER RELATIONS

BUSINESS CONTINUITY

LICENCE TO OPERATE

36%

17%13%

19%

10%5%

Business / corporate strategy

Capital structure

Capital allocation

Operations management

Risk management

Other strategy

7%

30%

2%

16%8%

14%

17%

6%

Audit / accounting

Board structure

Executive misconduct

Executive remuneration

Reporting issues

Shareholder rights & voting

Succession planning

Other accountability

20%

23%

16%

20%

19%2%

Climate change / carbon emissions

Energy management

Forestry / land use

Pollution / waste management

Water

Other environmental impact

6%

24%

14%22%

7%

6%

14%

7%

Diversity & inclusion

Customer relations

Health & safety

Human capital development

Labour rights

Privacy & data security

Product safety & quality

Other stakeholder relations

13%

41%

2%

35%

9%

Climate change vulnerability

Conduct / culture

Cyber security

Political risk

Other business continuity

8%3%

38%

29%

22%

Human rights

Controversial sourcing

Supply chain oversight

Tax

Other licence to operate

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VOTINGVoting plays an important part in our responsible investment and stewardship activities, as it provides us with an annual governance touchpoint with our investee companies. It also allows us more formally to hold management and boards to account should we not be successful in achieving our aims through engagement.

Our intention is that we should vote at every shareholder meeting. There are, however, occasionally issues that prevent us from doing so such as power of attorney requirements and share blocking. Where share blocking is present we refrain from voting in order not potentially to obstruct our other investment activities. Sometimes the complexity of the voting back-end can also cause us difficulties in exercising our votes.

OUR VOTING POLICYOur voting is informed by our house voting policy, which can be found within our broader Accountability Expectations document, which is available on our website*. This sets out our views on certain standards of corporate governance and behaviours that we believe to be particularly pertinent to engendering credibility and trust in boards and management. We use our voting service provider, Glass Lewis, to assist us in applying our policy in the first instance so as to allow us to focus in on the topics and companies that require our specific attention. As a key policy, we will not abstain on any resolution unless required to by law or other requirement as we want to send as clear a message to management as possible.

When implementing our voting policy, it is our hope that we will be able to support proposals put forward by the companies in which we invest, as we have actively chosen to invest in and support those management teams. Nevertheless, as responsible stewards we seek to promote high standards of corporate governance and where companies do not meet those standards we may vote against management to encourage improvement. However, we are keenly aware that there is no one-size-fits-all approach to running a company, and so are always willing to listen to companies’ explanations for why their own arrangements are right in the context of their own strategies and situations. Additionally, if the issues in question have already been discussed with a company and there are clear signs of improvement, we may vote in support of management in order to recognise the progress made by the company even though there remains scope for further improvement.

We will therefore vote against our policy if we feel this to be the correct course of action, which we record separately for audit purposes. We pay particular attention to those meetings of companies in which we are large investors, have invested a large amount of our clients’ assets or with whom we have an active engagement. The policy is also sufficiently broad that in many instances it cannot be applied without additional judgement, meaning that in reality we look at a significant number of meetings each year.

CLIENT INPUTAs our voting decisions are taken as part of our broader investment view on the company and in line with our engagements, our preferred approach is to retain full authority over the voting decision. However, for clients with segregated mandates we are able to accommodate specific voting instructions if they wish to instruct the vote themselves. We would of course be very happy to receive any feedback on the policy itself, which can be submitted either though our client services or directly to [email protected].

STOCK LENDINGOur current policy is that we do not engage in stock lending, meaning that we retain the full firepower of our investment on behalf of our clients when voting.

* https://www.merian.com/global/wp-content/uploads/2018/10/stewardship-accountability-expectations.pdf

OUR VOTING ACTIVITY OVER 2019During 2019 we voted at 1,585 meetings, voting against management’s recommendations at 57% of them. Full details of our votes by resolution can be found at the responsible investment web page on our website**.

MEETINGS VOTED FOR AND AGAINST MANAGEMENT’S RECOMMENDATION BY GEOGRAPHY

Region Total With management

% Against management

%

Global 1,585 684 43% 901 57%

Australia & New Zealand 70 44 63% 26 37%

Europe ex-UK 266 138 52% 128 48%

Latin America 88 22 25% 66 75%

North America 422 75 18% 347 82%

Asia ex-Japan 404 156 39% 248 61%

Japan 69 30 43% 39 57%

Africa 11 3 27% 8 73%

UK 255 216 85% 39 15%

By resolution this breaks down to voting against 13% of the 17,035 resolutions we voted over the period.

RESOLUTIONS VOTED WITH AND AGAINST MANAGEMENT’S RECOMMENDATION BY GEOGRAPHY

Region Total With management

% Against management

%

Global 17,035 14,859 87% 2,176 13%

Australia & New Zealand 411 364 89% 47 11%

Europe ex-UK 3,334 2,975 89% 359 11%

Latin America 818 618 76% 200 24%

North America 4,554 3,744 82% 810 18%

Asia ex-Japan 3,034 2,456 81% 578 19%

Japan 787 705 90% 82 10%

Africa 182 168 92% 14 8%

UK 3,915 3,829 98% 86 2%

This year again, of the total resolutions we voted against, the greatest number was against director re-elections and board structure for issues such as lack of sufficient independence. In certain instances we have sought to hold directors specifically accountable for their or the company’s performance.

The next largest category is management compensation which we continue to find often inappropriately structured and misaligned with long-term value creation for investors and wider society. We have long been calling for a wholesale simplification of executive pay, and continue to be dismayed by how much time is required to be spent discussing compensation practices in meetings between investors and directors when we suspect there are significantly better uses of those opportunities. Given that in 2020 many companies in the UK will be asking shareholders to approve their new remuneration policies, we have been actively promoting restricted share scheme structures, where performance conditions are removed from long-term incentive schemes in exchange for a significant extension to the vesting timeframe of the awards. This should help lift strategic time horizons, remove the incentive to manage the business to hit targets that are unlikely to capture a company’s performance in the round, and better reflect long-term value than the structures that dominate executive pay schemes today.

We also paid close attention to issues related to capital structure, predominantly to prevent excessive dilution of minority investors resulting from selective share placements.

Twelve percent of the resolutions we voted against related to issues in companies’ audits and their accounts, primarily due to excessive auditor tenure and fees, as well as unaudited financial statements. Audit quality is a specific area of interest for us, and we have been following and contributing to the ongoing debate in the UK on how to improve audit quality over the year.

** https://www.merian.com/global/about-us/responsible-investment/

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Turning to shareholder proposals, the topics we voted against management’s recommendations the most on related to social and ethical matters. In the main these related to providing greater transparency around companies’ approaches to political lobbying and related expenditures. In many instances we do not believe that political donations are a proper use of shareholder funds, and worry that funds can be allocated to lobbying groups whose wider advocacy efforts could be at best on topics we do not believe relevant for the investee company and at worst directly against the interests of the company’s shareholders.

We also voted in favour of a number of shareholder proposals related to governance. Generally these related to splitting the role of combined chair and CEO, which we believe to be a fundamental aspect of proper checks and balances on boards.

We also supported a number of shareholder proposals on environmental matters. Many of these requested companies in carbon-intensive industries or with high-carbon products to provide additional information on their strategies and targets to be aligned with the aims of the Paris Agreement. Through our membership of IIGCC and participation in Climate Action 100+ we were pleased to have contributed our shares to filing a shareholder proposal at BP requesting the company expand its reporting to discuss capital expenditure alignment with the Paris Agreement as well as Paris-aligned metrics and targets. Due to the fantastic work undertaken by the co-ordinators the resolution ended up being recommended by the company’s board and passed with over 99% of shareholder support.

RESOLUTIONS VOTED AGAINST MANAGEMENT’S RECOMMENDATION BY TYPE

Resolution type Number % of total

Management resolutions

Audit and accounts 264 12%

Board structure 812 37%

Capital structure 293 13%

Corporate transactions 9 <1%

Remuneration 619 28%

Shareholder rights/company articles 34 2%

Other business 36 2%

Shareholder proposals

Board related 29 1%

Corporate transactions 2 <1%

Environmental matters 9 <1%

Remuneration 10 <1%

Shareholder rights/company articles 27 1%

Social and ethical matters 32 1%

Turning to the year ahead, as mentioned earlier we expect to continue what has been some fairly intensive engagement with UK companies on their remuneration policy proposals. While we are actively promoting restricted share schemes we have recently seen a number of proposals recently that to us are not sufficiently revolutionary, and are mindful that these might set an unhelpful precedent. We will therefore only vote in favour of those schemes that we believe to be transformative in the incentives they provide to management.

We expect the number of high profile shareholder proposals about companies’ responses to climate change to increase in 2020 as the urgency for a meaningful response from carbon-intensive industries and those financing them increases. We also expect that a number of these concerns might spill over into other areas of voting, for example by holding directors accountable for inaction on climate change.

We will also be taking great interest in how companies in France respond to the Loi PACTE, adopted in 2019, which allows businesses to specify their “purpose” in their by-laws. These amendments will need to be voted on by shareholders. If this opportunity is taken up meaningfully we suspect it could have a transformative impact by recognising at the heart of a company’s legal documentation how it adds value to society.

RISK OVERSIGHTAt the core of our approach to responsible investment is independent and robust risk oversight of environmental, social and governance (ESG) factors provided by the investment risk team. This ensures that while the investment teams are responsible for the construction of their portfolios, we have a formal governance process in place to monitor and query exposure to these issues.

Developing ESG oversight capabilities within the risk team allows us to leverage our existing risk management tools and processes to deliver tailored analysis to our investment teams and fully integrate the consideration and monitoring of the related risks within the investment process. This has been a key focus for 2019 and will continue to be in 2020.

PORTFOLIO MONITORING Third-party ESG data and research are consumed, analysed and transformed within the risk team and ultimately leads to the construction of AIM data for the investment teams as well as allowing for independent monitoring. The portfolio monitoring processes are intimately connected with the development of our integration efforts; as we continue to improve and systematise our monitoring tools so too will our AIM processes and engagement prioritisation be enhanced.

Over the last year we have completed the automation of up to date AIM screens and scores to our equities investment teams. Underlying ESG data, material to the portfolio, along with corresponding AIM scores are delivered daily to the investment teams via Bloomberg.

INDEPENDENT CHALLENGEIn addition to developing bespoke ESG research and analytics, the investment risk team provides regular challenge through daily interactions with the investment teams. Crucially, we have enhanced our ability to respond to requests for information, through the integration of ESG data into our existing risk reporting and investment platforms.

Additionally, our Quarterly Investment Risk Committee (QIRC) provides independent oversight of portfolio management activities for all MGI funds and strategies through a formalised governance structure. This committee comprises MGI’s audit committee chair, chief executive officer and company secretary as well as other members of senior management from investment risk, investment performance, compliance and product. With the integration of ESG challenge through this governance structure we are able to plug in to established challenge and escalation processes at the highest levels of the business.

Over the year we have formalised quantitative reporting of ESG risk into the QIRC dataset. The QIRC is informed by an ESG dashboard containing key ESG risk metrics across portfolios, designed to illustrate the most material investment and reputational risks within our portfolios. The dashboard captures portfolio performance across accounting and governance risk, overall ESG performance and compliance with global norms such as the United Nations Global Compact (UNGC). A traffic light system indicates where portfolio performance does not meet internally set thresholds. For example, portfolios with exposure to companies that have failed the UNGC principles will be flagged for additional review. These reviews involve discussions with the relevant portfolio managers to ascertain and implement the most appropriate response.

In addition, any notable stock specific ESG risk informed by the QIRC process, or indeed through any other ESG process run within the business, is communicated to the board on a quarterly basis by the head of investment risk along with the actions to be taken. Progress against actions is also communicated at subsequent board updates.

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PUBLIC POLICYAs active investors we take a deep interest in the policy environment and the systemic issues in the markets in which we invest. The issues and topics will vary by investment team based on its geographical and sectoral exposures, and the ways in which the teams respond to them will differ based on their investment styles and strategies. More detail on how our investors consider and respond to these sorts of issues can be found in the Insights section of our website*.

Where we feel that the investor voice is warranted we will seek actively to contribute to the development of public policy debates. As members of the UK Investment Association (IA), we will often look to contribute to governance and investment policy consultations by seeking to influence their responses. In this light we are members of the IA’s Company Reporting and Auditing Group (CRAG) and also its Sustainability and Responsible Investment Committee, both of which have been very active over the year on both audit and accounting as well as wider sustainability consultations. Our membership of the Institutional Investors Group on Climate Change (IIGCC) also means that we maintain an up-to-date understanding of, and can contribute to, climate change policy debates. Through membership of these and other bodies we are able to contribute with collective influence that is likely to be greater than our lone voice.

In other instances, particularly where we have specific knowledge and expertise, we will respond directly to consultations, and meet with regulators to discuss current and emerging topics.

AUDITThere have been considerable developments in the audit market in the UK over the last year, including the results of the Competition and Markets Authority’s (CMA) review into competition in the audit market and the Brydon review into the quality and effectiveness of audit. We have continued to meet a range of audit firms and audit committee chairs in the UK in order to get a better understanding of audit quality and promote the investor voice in the consideration of how an audit is designed and executed. Given the clear expectations gap between the industry and those it is there to serve, we are glad that the recommendations of the reviews have been wide-ranging and mainly helpfully reformative. We are also pleased to note a number of changes at the Financial Reporting Council (FRC) as well which imply that the regulator is taking a more proactive and firmer approach to oversight.

UK STEWARDSHIP CODEHaving responded to the consultation on developments to the UK Stewardship Code in 2018, we continued engagement with the FRC over the period on its ongoing development, happily supporting some of the more radical approaches being examined to push the investment industry in the UK to leading standards of stewardship and ESG integration. We are very pleased to note that the final Code retains the ambition of the original proposals, including moving to more focus on outcomes than policies and asking investment firms to set out their purpose, investment beliefs, strategy and culture. We intend to become signatories of the 2020 Stewardship Code, and this is our first report against its Principles.

CORPORATE PURPOSEOn the subject of purpose, we have been taking a keen interest in the evolving debate on corporate purpose, and are interested to understand the benefits this could have for the capital markets. We have participated in roundtables and research co-ordinated by The Purposeful Company in order to provide an investment view, and are keen to support a policy environment whereby purposeful companies are able to make themselves attractive for mainstream investment. Started in 2019 and continuing in 2020 we are undertaking a piece of research specifically related to understanding in more detail how the concept of purpose could be useful in the context of capital allocation processes.

CLIMATE CHANGEWe again signed the Global Investor Statement to Governments on Climate Change25. This letter was signed by 631 investors managing over US$37 trillion. It asked for global leaders to align climate policy with the Paris Agreement, improve market mechanisms for carbon pricing and push for improved climate-related financial reporting.

* https://www.merian.com/global/insights/

CASE STUDIESIn the following pages we provide a number of case studies of our responsible investment and stewardship activities across our investment teams. These are intended to provide insights into how these topics have real impact for our investments on behalf of our clients, and should be considered bearing in mind each team’s responsible investment philosophy and investment style. These examples are not exhaustive of all the topics we have been discussing with these companies, not least in the interests of brevity, but are intended show how in combination our integration, voting and engagement activities play a part in our investment processes.

EUROPEAN SMALLER COMPANIESBUILDING MATERIALS SECTORWhy are we invested in the company?This company operates in a highly cyclical capital intensive industry, which has meant that historically the market has attached low valuation multiples to it. What the market has failed to recognise is the transformation of the business with best practice, benchmarking and portfolio optimisation driving return on capital higher.

What are some of the key issues?The company is in the process of executing a multi-year program of optimisation which was clearly stated at its launch. In 2018 a local shareholder took a substantial stake in the company and began agitating for change at the board level and also to the restructuring plan. The activist shared their views with the market as whole including us at MGI, which clearly raised questions. Another unconnected issue for the business is its heavy carbon footprint which is inherent in the manufacturing of clay-based products.

What have we done over the year?We have engaged with management, investor relations and the board on the various issues. Following the attention created by the activist, we contacted the company to hear their view and to discover whether they would be making any changes. On the board composition we were reassured on the best practice that is already being followed in terms of independence, diversity and international composition. As a result we supported the management’s board nominees at the AGM ahead of those proposed by the activist. Following dialogue, the company has begun to explicitly publish more details of long term incentive schemes and their links to the execution of the plan.

On a separate issue we engaged with the company as it flags as one of the highest producers of greenhouse gasses in our portfolio. The company is aware of the issues and through heavy investment and innovation is improving its emissions each year. Partly as a result of increased incoming engagement on sustainability, the company has stepped up efforts on recycling of clay and plastic products, but also in promoting the excellent energy saving characteristics of their products to their customers, educating them on the lifetime cost of ownership savings compared to cheaper building materials.

What are the implications for our investment?The attention triggered by the activist has created greater engagement and scrutiny of the company which in turn has encouraged them to be more open and forthcoming with their communications. This clearly helps the valuation of a company where many had failed to appreciate the ambitions of its modernisation programme.

The sustainability issues also provide an opportunity, whether it be through investment to reduce the carbon footprint in manufacturing and distribution, efforts to highlight the superior thermal performance of clay blocks over competing products, or moves to increase collection and utilisation of scrap products to use as raw materials in their production. Ultimately companies that have a sustainable future will attract higher multiples than those that ignore these changes and seek to maximise profits short term.

FINANCIAL SERVICES SECTORWhy were we invested in the company?We invested in this private equity investment company because it has a strong track record of buying distressed businesses, inserting a turnaround taskforce and, having restored industry-normal levels of profitability, then realising substantial profits by selling the businesses to industrial buyers. We have sold our stake as we were unable to gain comfort that some of our areas for concern were being addressed.

What were some of the key issues?The company was subject to a short selling attack in 2017 which caused a precipitous decline in its share price at the time. The company made great efforts to answer and dispel the claims made against it and engaged with its shareholder base which helped the share price to recover. We remained concerned about three issues: that investor relations communications to us did not come from the company but instead from an external agency, that the executives no longer declare their shareholdings in the company, and with the composition of the supervisory board.

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What did we do over the year?We contacted the chair of the supervisory board by letter raising our concerns and following an exchange of communications with him we arranged a conference call to discuss these matters further. On the call we were not able to get any comfort on the independence of the board and its ability to conduct rigorous oversight. The company committed to considering insourcing its Anglo-Saxon investor communications (claiming that it already does this in other regions) although there has been no sign of this happening so far. On the final issue of executives declaring shareholdings there is no prospect of this changing.

What were the implications for our investment?Following the call it was agreed that on the issues of governance and disclosure the company falls short of the levels that we would expect and shows little willingness to change this. The issue of employing an external agency to run investor communications rather than doing this in house, even for a limited part of the investor base, is unusual and unsatisfactory. As a result we raised our cost of capital and lowered our price target with a focus on selling when our only major catalyst occurred, which was a disposal of one of its holdings. As this happened shortly afterwards, we disposed of the fund’s holding.

GLOBAL EMERGING MARKETSOIL AND GAS SECTORWhy are we invested in the company?The sole energy company in the team’s portfolio and a business we had not previously owned for nearly ten years, this company was once a world leader in offshore exploration and production but over the past decade has allocated capital poorly in overexpanding beyond its capabilities, has suffered from government interference, and has recently been at the centre of a huge corruption scandal. We believe new management, supported by a realigned majority shareholder, has moved forward from the scandal and is in the process of dramatically shrinking the business to refocus on the core E&P strength and reduce risk. In addition, management has laid out return on capital and economic value added targets, a first for the company and representative of a change of mind-set.

What are some of the key issues?There are two immediate priorities. Firstly, we want to understand the extent to which the company has changed oversight, procedures and training in the wake of the corruption scandal. Secondly, our other area of engagement has focused on health and safety. We view the company’s deep-water offshore oil production as the most material risk element to the company’s workforce, the environment and ultimately its reputation. A key longer-term priority is the extent to which the company’s strategy and asset exposure is compatible with the aims of the Paris Agreement.

What have we done over the year?We have engaged with management, compliance, environmental protection and IR functions on the various issues. The company was open and forthcoming, and we obtained greater comfort that compliance procedures and checks have been materially strengthened and that procurement has been centralised. Limits of expenditure authority at managerial level have been reduced and second signoff is required above a hurdle threshold. The company’s by-laws and board independence have been strengthened, making a repeat of the government interference and price controls that plagued 2010 to 2016 very difficult.

On health and safety we noticed a cultural change that began in 2016, moving to embed safety throughout the company, has been followed with a greater commitment to training and learning from previous accidents and improvement to process safety indicators. There is still further room to improve. Above all, we are trying to ascertain that individuals operate in a clear chain of command and are empowered to stop activity if they are concerned over safety, without fear of reprisal (learnings from the Deepwater Horizon accident in 2010 highlighted poor crew training in certain shutdown procedures, unclear lines of responsibility between BP employees and contractor employees, and the placing of short term profit targets against technically sound drilling but more expensive drilling practices).

What are the implications for our investment?In modelling intrinsic value for the company we have assumed a higher, more punitive, cost of capital due to the historic governance issues. We would hope to see continuing improvement on governance and health and safety that would allow us to reduce this “penalty”. We believe the company is on the right path to becoming smaller, leaner and ultimately much better run, so we are alert for any signs of deviation from this path. Over 2020 we will discuss the company’s low carbon transition strategy in detail.

RETAIL SECTORWhy were we invested in the company?We invested in this Indonesian retailer as it generates high returns on capital and we felt the market was overly pessimistic about the threat of online competition – we acknowledged it was coming, but not at the speed priced in by the market. For this reason, and a governance discount, we felt the company was priced well below our estimate of intrinsic value, even though we had used a higher cost of capital in our model to account for this.

What were some of the key issues?The main issue surrounded the company’s governance. Specifically, the company had attracted a governance discount due to its historic ownership by a family group and a history of some related party transactions that had not been well received by investors. We also felt that the board composition continued to look very stacked towards the family, giving them de facto control even though their equity ownership had fallen over the years to c. 18%.

What did we do over the year?We sought to engage with the company and its board as we felt some relatively simple changes to governance (including family commitment to no further related party transactions and a change in board composition for some fresh thinking and to reflect the family’s lower ownership) would be beneficial to all shareholders in reducing the governance discount. We contacted the chair of the board by letter raising our concerns and attempted to engage with C-suite executives, both directly and via the IR function. Unfortunately neither the company nor board showed any interest in engaging with us.

What were the implications for our investment?After several unsuccessful attempts to engage with the company on these issues, it became clear to us that there was little willingness to change. We divested our holding in the company.

GLOBAL EQUITIESTECHNOLOGY SECTORWhy are we invested in this company?Our investment in this company is driven by the systematic investment processes of our global equities investment team, which selects stocks on the attractiveness of their valuation, quality, price trends, stable growth prospects, sentiment and company management.

What are some of the key issues?The company has, over the last few years, seen a significant turnaround that ended a decade of flat share price to returning greater than 25% annually over the last five years following the appointment of a new CEO and chair. Succession planning for both roles, and clarity to investors on this process, is therefore fundamental at the company. Additionally, as the company enters new areas of growth, issues such as data privacy and security, as well as the ethical issues around artificial intelligence, present challenges for the company and the sector as a whole as it pursues new product and growth opportunities.

What did we do over the year?We engaged with the company on a range of topics covering in the main governance and social issues.

On governance, we discussed board succession planning and development. The board maintains a 10 year average tenure limit for its directors. We enquired how this might apply for the chair, who we believe to have been instrumental in the transformation of the company, and whose succession will need to be very carefully planned and signalled. We impressed the importance of the market being prepared for this event and the need for communication as and when the issue becomes more of a priority.

We also discussed auditor rotation given that we had voted against the re-appointment of the auditor based on their tenure at the company of 35 years. It appears to be challenging to find a firm without conflicts through provision of other services to the company. We pressed the importance of demonstrable auditor independence, which in general can only be externally assessed by tenure. The company has recently implemented a training programme to make sure that its salespeople do not develop relationships with its auditor, so it is clear that the company is well aware of the issue and the potential concerns.

We also discussed the executive incentive schemes, which we also had voted against at the 2019 AGM due to short-term target setting and the significant use of long-term incentives that are not performance tested but that vest only over a period of four years. The company has evolved its incentive system significantly over the last few years, the compensation committee chair is soon to change, and the incentive schemes are continuing to evolve, so we agreed to continue dialogue in the coming year.

The company has been focussed on the question of how large platforms take responsibility for content. The company is clear that some government support is required to strike the right balance between freedom of expression and content control, however has also been working with some industry peers in particular on extremist content. It has also introduced a partnership to flag potential fake news through its web browser, and has been instrumental in taking down Russian bot networks, for example. This appears to be a never-ending challenge for these companies, and we will need to continue dialogue on how societal expectations are evolving.

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The company has its own ethical principles and an office of responsible artificial intelligence, which works across all its applications. It has been aggressive in calling for governmental regulation on uses of the technology, and has in fact turned down opportunities to work with law enforcement agencies due to privacy concerns in the intended use of AI. An internal committee comprising researchers and other company management can make go/no-go decisions on product uses, and indeed has done so in the recent past turning down significant sales opportunities. The company is also providing training on AI and fairness to help draw lines around what is acceptable. It also makes some efforts to explain this to its customers who might use its platforms for AI development; however APIs are harder to control. This extended responsibility is on the radar of the leadership team, however.

What are the implications for our investment?The engagement thus far has reinforced our views that the company is addressing the material issues for it and the sector. Given the rapid developments and societal expectations, we will need to continue engaging with the company, not least on succession planning given the potential impact on value should this not be handled well.

TECHNOLOGY SECTORWhy are we invested in this company?Our investment in this company is driven by our systematic investment processes, which selects stocks on the attractiveness of their valuation, quality, price trends, stable growth prospects, sentiment and company management.

What are some of the key issues?Being a leading technology business the company is exposed to many of the data privacy, security and ethics issues common to the sector. It has also experienced recent labour unrest related to sexual misconduct issues that have resulted in several senior management dismissals. There are a number of governance concerns as well, including multiple share class structures which concentrate voting control in the hands of the founders. At the end of 2019, the two founders relinquished their executive positions but retain board seats.

What did we do over the year?We initiated our engagement this year with a group call with the company and other investors. As usual with these types of calls it is hard to get into much depth on many issues, with presentations taking up much of the time and less opportunity for questioning, particularly around topics that are not on the agenda.

The company has appointed a new board member over the period, with their orientation under way at the time. Two directors also left the board following the AGM. There is some significant top-level change – as well as the two founders moving out of their executive positions, the company’s previous CEO also relinquished his board seat in favour of an advisory role. The board regularly meets members of senior management through their presentations at board meetings, which should help address succession visibility further down into the organisation. The board also aims to get out and about in the business to experience it first-hand.

The company sees itself as a leader in artificial intelligence. It maintains ethical principles that set out that its application of AI should be socially beneficial, and that responsibility should be at the core of development. There is a formal review structure including senior executives, external advisers and experts for new applications of AI.

On data privacy the company believes that the concept must be universal. In doing so, it wants to be clear about how it uses data to make products helpful, and allow the choices users need to make about the extent to which their data is used simple. There is a focus on federated learning, which allows more data processing to be done on a user’s device, thereby removing the need for the company’s cloud computing and processing to be involved. This result should be higher quality products that require less, but better data. We were unable to explore this further, but we think it could have profound effects on the company’s business model.

Labour relations have been a focus for the business. It has updated its workplace commitments recently to clarify how employees can raise concerns and has implemented a new programme to look after and protect employees who raise concerns. It has also published its 5th annual summary of complaints with an expanded report on sexual harassment. While transparency is important it was not clear how effective the programmes are, and we were unable to dig deeper into this.

What are the implications for our investment?Will need to monitor the governance developments and how the executive changes bed down. It is clear that there remain some cultural challenges at the company and we will need to see evidence of these being addressed. The wider question of business models in the age of data privacy is still being worked through and we will continue to explore this with the company should we have the opportunity to dig deeper.

GOLD AND SILVERGOLD MINING SECTORWhy were we invested in the company?The company was an ASX-listed gold producer with an open pit gold mine in Australia. Our site visit in August 2016 and investment case suggested that gold production could be expanded by developing an underground mine and adding components to the mill, providing greater flexibility that would enable more complex ore types to be processed.

What were some of the key issues?In order to meet working capital requirements, and unable to extend the duration of its existing debt facility or raise new equity, the company reached an agreement with its largest shareholder to provide a term loan with a high interest rate of 13.5% p.a. for a period of 18 months to develop the underground mine and to complete the expansion of the mill. Late last year the loan was upsized and the interest rate increased to 18.5% p.a. as it became increasingly clear to the company that the underground mine and improvements to the mill would cost more than originally thought. The company’s failure to be transparent over the need for this loan and the failure to explain the requirement for an abnormally high interest rate resulted in us adjusting our operating and financial model of the company. Our revised estimates showed continued balance sheet stress without additional financial support, which we were not prepared to offer without more transparency.

The omission to announce the departure of a respected chief operating officer after less than a year in the position supported our belief that the company was not being open in explaining the technical and working capital hurdles it was facing in developing its underground mine and expanding its mill.

We also identified a key governance issue. Specifically, there was a lack of independence on the audit and risk committees, with two affiliated directors serving on both. In our view, the audit and risk committees were unable to operate effectively and did not provide robust and consistent risk management and internal controls. Despite his non-executive status, we viewed the chair as non-independent as he was previously an executive. In our view, this lack of independence facilitated the related party working capital agreement with the company’s largest shareholder, which was to the detriment of other shareholders.

What did we do over the year?After the related party loan was announced to the market, we engaged with the company to highlight the lack of independence on the audit and risk committees. The company reiterated its belief that its audit and risk committees were fully independent and that the related party loan was to the advantage of all shareholders.

Our analysis suggested that the capital structure of the company was influenced by poor governance so we voted against the award of performance shares to the non-executive directors at the most recent AGM.

What were the implications for our investment?Whilst we appreciated the company’s requirement for working capital in order to continue expansion activities, the structure of debt financing through a related party transaction was not only expensive but worked against existing shareholders’ best interests as equity would have to be raised to retire the debt if the gold price fell or the mining operation underperformed expectations.

As a consequence of poor corporate governance, together with potential dilution from the related party loan reducing the future value of our investment, we sold our position in mid-2019. Subsequently, the company granted security over its assets to its largest shareholder and entered into an additional agreement to increase the related party loan to cover its working capital requirements. Ultimately, these measures proved to be insufficient and the company went into administration in late 2019.

SILVER MINING SECTORWhy are we invested in the company?The company maintains a listing on the NYSE and owns a number of silver mines in North America. The shares are liquid and offer excellent leverage to higher gold and silver prices.

What are some of the key issues?In 2017 the company overpaid for a new mine that subsequently underperformed expectations and has become a distraction to management. We visited this mine in mid-2019 to understand more about these issues. The mine is in the early stages of production and suffers from a poorly constructed mill that has resulted in unscheduled downtime and high maintenance costs. Parts often have to be custom made with long lead times and substantial modifications are ongoing to improve operating performance. Employee turnover at this mine has been high which has resulted in further disruption to business continuity and highlighted potential poor human capital development.

Additional concerns were raised over governance, transparency, and the appropriate use of shareholder funds when the company struggled to explain its use of a private jet belonging to the former owner of the underperforming mine. This was observed on the site visit to the mine and was not reported as a potential related party transaction.

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A fatality at one of its mines in 2018 suggested a failure of the company to provide a working environment that is conducive to health and safety of its employees. The company’s delayed reaction in reporting the fatality resulted in the circulation of rumours on social media which caused confusion over what actually happened.

Prior to our engagement, the company did not report ESG data and did not produce a sustainability report.

What have we done over the year?After our site visit, the underperforming mine has continued to miss its operating targets but the rest of the mine portfolio has performed to expectations. A higher silver price in late 2019 has bought the company more time to improve operating performance. During a conference call with management after the site visit, it was disclosed that employee turnover was stabilising, with only four employees leaving the mine in September.

We advised the company that, if it was intending to produce an annual sustainability report in future, it would be in its interests to disclose data relating to its employee turnover, water use and lost time injury rates to develop a track record.

We proposed that the company should be included in an industry initiative on tailings dam safety. The company responded to the information request. During a conference call which happened as a result of this disclosure, we encouraged the company to provide additional information on what constitutes an environmentally harmful ‘discharge’ and ‘significant spill’ and how they impact executive remuneration.

What are the implications for our investment?After our engagement, the company has started to report key ESG metrics including employee turnover rates, water use and Lost Time Injury Rates. While these numbers are reported on a consolidated basis and do not enable us to review individual mine performance, they enable comparison with the company’s peer group and enable us to track changes over time. We will conduct further analysis into individual mine performance after the inaugural Sustainability Report is published in 2020.

UK LARGE CAPEXTRACTIVES SECTORWhy are we invested in the company?The business has a unique combination of a marketing division managing commodities logistics between buyers and sellers, and an industrial division mining assets across a range of non-iron ore commodities. The marketing division underpins a base level of dividend which may be increased through profits from the industrial division, and the shares offer exposure to a diversified set of major commodities.

What are some of the key issues?Operating in the extractives sector, particularly with coal assets, the company is highly exposed to the risk of carbon regulations which will have implications for the company’s costs as well as the future demand for its products. The company is also under investigation by multiple authorities for alleged instances of corruption in several countries. Additionally, while the company’s safety metrics appear to be improving, fatalities remain an issue and it is particularly exposed to labour disputes in certain geographies.

What have we done over the year?With both the chair and the CEO we discussed the announcement that the company would cap its coal production – an agreement made in conjunction with a leading investor group focused on climate change. The company’s own climate risk assessment suggests that it views its coal assets as being compatible with a policy environment in line with the Paris Agreement given its geographical exposures. This appears to be at odds with the International Energy Agency’s own projections on demand for the commodity under its Sustainable Development Scenario. While we are encouraged that the company is making commitments around carbon and climate change, we are mindful that this thinking needs to be ingrained at the strategic level for it to have full impact. We challenged that in the future cash flows from business activities aligned with the low carbon transition are likely to be more highly rated than those from the most carbon intensive fossil fuels. We also discussed possible options for the coal business should the market’s view continue to harden about the investibility of thermal coal.

On culture, the company appears to have made a number of helpful changes to its management structure that means that information and issues should be able to escalate more readily and quickly and it has bolstered its compliance capabilities significantly. The board has also implemented a new committee in light of new governance expectations that boards have increased oversight of culture. Several members of senior management have left the business recently, implying some cultural turnover, and we discussed some interesting developments in how the company now debates the legality and ethics of certain business activities. Given the ongoing nature of the corruption investigations we were not able to discuss the specifics.

Health and safety continues to be a priority for the company, with the challenge being how to ensure that policies are followed properly. This has recently involved upskilling supervisors to provide better oversight closer to the dangerous operations. Technology will be the ultimate solution; however removing humans from mines entirely is many years away. The chair has been instrumental in pushing for improved management of tailings dam safety, which has resulted in expert reviews of all the company’s mines. However we were disappointed to note an increase in fatalities at the company over the year from an already high number.

What are the implications for our investment?The company’s exposure to carbon regulation remains a key issue, and we need to undertake further research to understand the company’s assessment of its assets and product demand risk from carbon pricing. As a major cobalt producer, the business can in theory play a role in the energy transition through supplying manufacturers of batteries for electric vehicles, but much rests on the risks surrounding the coal asset. The impacts of both cannot simply be netted off.

The company has been maturing in terms of culture and governance since its IPO which should improve its rating; the shares trade on a high free cash-flow yield and the cultural transformation of the business is ongoing. Generational change on the retirement of the CEO in the near future will be an important further milestone in this regard. The ongoing investigation could still result in large fines, particularly given the history of the regulators involved; the market tends to regard such penalties as ‘legacy’ issues as long as behaviours and culture can be shown to have improved. This is an area we need to continue to test with the company.

TRANSPORT SECTORWhy are we invested in the company?Whilst airlines will always be cyclical, the company has done a remarkable job – aided by its strong position at a major airport – of improving profitability and returns on capital across the cycle, through its multi-brand strategy and cost control, leading to both dividends and share buybacks.

What are some of the key issues?There has been a string of challenging news coming from the company’s largest operating company which comprises nearly three quarters of the company’s operating profits in recent years. In 2018 the company suffered a large data breach including customers’ bank card details for which the regulator announced a significant fine towards the middle of 2019. This came on top of pricing errors and flight cancellations due to an IT blackout in the same year and more recently the company was forced to cancel a large number of flights following pilot strikes. These issues, among others, appear to have contributed to poor customer perception of the brand which risks becoming material for the investment case should they spill over into the higher margin parts of the business.

What have we done over the year?We have met both the chair and management several times over the period. On labour relations, the company is clearly highly disappointed by the pilot strikes. A planned second round was subsequently called off. The board has now appointed three directors to be responsible for employee issues at each operating company, which should improve the breadth of feedback the board receives. Additionally the board is actively looking at the culture across the operating companies with a view to considering a more common set of expected behaviours and values.

With regard to IT, the board has increased its focus on data security, particularly through the audit committee. It has also recently appointed a new group chief information officer to the management team, which will be helpful in raising the level of oversight and setting a group-level strategy. Given the ongoing legal process we were unable to discuss the specifics of the data breach itself.

We have also focused our discussions on customer service. The business is in a challenging situation as it needs to keep costs low for some routes in order to remain competitive with low-cost peers, which has involved removing certain services, naturally leading to a decrease in the relative perception of the quality of service. On the other hand, the company is also investing in its higher margin propositions with new aircraft and seats; however, these are some years away from delivery. While the company publishes an average customer service metric we have suggested that a more granular breakdown by operating company would be helpful to enable us better to measure progress. We have also questioned whether some additional centralised oversight of customer relations might help to disseminate best practice from other operating companies within the group. Furthermore we have challenged whether the company’s PR efforts in response to issues, including those outside of the company’s direct control such as air traffic control strikes, could improve to better manage their impact on customer perception. Helpfully the company has also been working with consultants to look at a brand equity strategy by operating company and customer segment, which should help focus communications more.

What are the implications for our investment?The enhanced board oversight of labour relations is clearly a helpful step in bringing additional focus on the issue. Similarly, the appointment of a group CIO should bring a more centralised and coherent approach to the IT and data security strategy. We will need to meet the individuals involved over time to understand the impact of the roles and the changes being made.

We will continue to monitor customer perceptions of the brands – ideally with more detailed disclosure from the company. Bottlenecks on new seat supplies are an industry issue, but it was encouraging to hear from the company that it is pursuing potential alternative suppliers. Alongside peers, the shares are currently pricing in a material down-cycle which we do not believe will be the case, so our investment will navigate between the industry environment and the company-specific challenges.

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UK SMALL AND MID-CAPFASHION RETAIL SECTORWhy are we invested in the company?The company is a rapidly growing, UK-based online fashion retailer. The company has invested heavily in a state-of-the-art distribution capability and has an infrastructure that is able to support a materially higher level of sales than is currently being achieved, in our view. The company delivers materially higher margins than other online clothing retailers; it is delivering very high growth rates in its home market while growing rapidly overseas as well. The company has delivered multiple instances of positive surprise to the market in terms of sales growth, and our analysis suggests this will continue. The pace of sustainable sales growth and margins are in our view best in class.

What are some of the key issues?Given the nature of the company’s product, it is exposed to supply chain risks, including labour standards and raw materials sourcing, which are potentially further challenged by the price points and the geographic footprint of parts of the supply chain. The company’s reporting on these topics could improve in order to provide investors with additional clarity on its approach to environmental and social issues in the sector, not least as it was highlighted as an area for improvement by a governmental investigation into the sustainability of the fashion industry.

Additionally, over the period there was a significant reshuffle in the leadership team, including the departure of the company’s chair and the elevation of one of the founders and co-CEOs to executive chair to accommodate the appointment of a new CEO from a peer. There was additional board turnover at the same time as well. This has left the company with an unusual governance structure, at least in a UK context, and it is important that there are sufficient board-level checks and balances in place.

What have we done over the year?On governance, we met the company’s senior independent director in order to get additional insights into the background to some of the changes and how they were managed. We discussed how the board might need to develop over time, and provided thoughts on some of the characteristics of the required profile for two crucial appointments in a deputy chair and audit committee chair. While the process of the change in leadership was unconventional, the founders have importantly remained with the business and we see the new CEO as a top quality appointment; it was helpful to hear that certain important governance lessons were learned as a result of the process. We were also pleased to note the appointment of a deputy chair in early 2020.

We also held a separate meeting on sustainability topics at the company. It is clear that the company has a range of sustainability initiatives under way; however, a clear and consistent strategy for how to consider important sustainability initiatives was less clear at the time. Subsequent to our meeting, and as had been previously signalled to us, the company has appointed a head of sustainability and responsible business which will be crucial in bringing together many of the related threads. The new CEO has also come from a company which has had high profile supply chain issues in the past and subsequently has been very focused on oversight and quality standards. In particular he has been championing improved supply chain visibility early on in his tenure. While around half of the company’s supply chains are in the UK it does still use suppliers in higher risk countries, which poses additional challenges in managing the risks, given both the distance and the potential sub-contracting involved.

We also discussed enhanced board-level oversight and monitoring of the supply chains, including whether the board should spend more time visiting suppliers to understand conditions on the ground. Additionally we challenged whether sustainability KPIs should be expressly factored into performance incentives for executives and buyers.

More generally we suggested that the company’s disclosures on its approach to sustainability could improve.

What are the implications for our investment?We will continue to look to understand the company’s recent governance changes and how the board operates and makes decisions. We will also look to meet the new head of sustainability and responsible business to understand their vision for a sustainability strategy at the company as well as the key aspects of supply chain and sourcing risk management that need to develop. We will conduct a factory site visit in early 2020.

Our focus will be on ensuring that the intrinsic strengths of the company’s financial model are complemented with a rigorous accountability and sustainability framework which serves to underpin the sustainability of what we expect to be an enduring high growth investment case.

ENTERTAINMENT SECTORWhy are we invested in the company?Valuations and regulatory developments have recently combined to make the risk-reward of the sector favourable. Industry trends should mean larger players take share and we are encouraged by the fact that larger operators are trying to be proactive in setting high standards of responsible business behaviour. In that context we believe the company is best positioned, owing to its technology and geographic diversity, to grow.

What are some of the key issues?From an earnings perspective, reflective of its competitive advantage in technology and geographic diversification, the company has outperformed its peer group. Nevertheless governance concerns mean the share price has not reflected this. The company has grown in size quickly, and its governance arrangements need to develop in order to meet the requirements and expectations of a company of its size; the company’s recent history of sizeable votes against its remuneration arrangements, questions about board independence and poorly-timed board share sales all point to areas that require attention in order to protect value and take the company to its next stage of growth.

What have we done over the year?We have been engaging with the board and management throughout our investment but significantly increased intensity this last year. We are mindful of the company’s entrepreneurial culture and its contribution to its success, as well as the crucial importance of the top team’s continued motivation to perpetuate the positive momentum in the business. We do, however, believe that certain aspects of the board’s composition need to improve to ensure sufficient levels of challenge and independent checks and balances are in place. We felt this was evidenced by co-ordinated board share sales over the year at an already depressed valuation, which were negative for the share price. We discussed these sales with the senior independent director to understand whether they were indicative of a change in motivation at the top of the company. We received reassurances that the CEO remains fully motivated, and noted in the 2018 annual report that the senior independent director would commence a search for a new chair of the board over the year. We discussed the potential profile of the ideal candidate with him and pressed that this appointment is crucial in taking the company’s governance to the next level while also protecting the important entrepreneurial aspects that make this company distinctive in its sector. Towards the end of the year the company announced it will appoint a new chair in early 2020, whose background and experience appear valuable for the business and we hope will help give confidence in governance improvements.

On remuneration matters we were worried about the apparent lack of stretch implied in some of the targets in the company’s long-term incentive scheme as well as changes to salary. This is particularly important given the apparent disconnect between performance and valuation and the need for positive communication about the board’s expectation of management’s performance. While we were unable to agree with the company’s approach, and so voted against the remuneration report, we have subsequently been engaging with the remuneration committee chair on the design of the company’s 2020 remuneration policy. It is important that the new structure is able to attract and motivate top talent in the industry and promote strong long-term performance, while also conforming to the governance expectations as a UK premium listed business, which, we appreciate could be a delicate balance. We have also been actively pushing that the company’s responsible business strategy should be incorporated into the incentive schemes given the importance to its licence to operate and competitive advantage.

What are the implications for our investment?We continue to believe that the company is very well placed to take market share and grow organically and, with the share price at today’s levels, view the risk-reward profile as attractive. We expect the governance profile to improve over the coming year as the new chair beds in, which should be positive for the valuation and which we will therefore actively support through engagement. We also think the company’s stance on responsible gaming, and in particular pushing for high levels of regulation for the sector, to be helpful for both its own competitive advantage and also in demonstrating its commitment to be the world’s safest and most trusted gaming platform. We will continue to engage with the company on governance and wider matters including strategy, capital allocation and culture.

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RESPONSIBLE INVESTMENT PHILOSOPHIESIn order to best reflect our updated responsible investment capabilities, each equities investment team has, over the past year, reviewed its responsible investment philosophy to be more explicit about its own approach.

As you will see, these philosophy documents apply only to our equities teams. A major focus for 2020 is going through the same process with our fixed income teams. We will also be working with our newest investment team, Global Dynamic Allocation, which joined MGI in December 2019, as well as with the managers of the Merian Chrysalis Investment Company.

These documents are accurate as at 31 December 2019. The investment teams’ approaches continue to evolve, and as significant updates to their processes and philosophies are formalised their documents will be updated. For the most up to date versions, including the funds that these cover, please visit the responsible investment and stewardship section of our website.

EUROPEAN SMALLER COMPANIESThe objective of these funds is to deliver long term capital growth through investing in a diversified portfolio of assets. Smaller companies often offer more opportunities for the responsible investor due to their high innovation rate and lack of legacy issues. The team employs a bottom up approach to reduce a universe of more than 5,000 companies to a portfolio of 45-55 holdings with a bias towards growth, quality and financial strength. Depending on the type of investment our initial investment horizon is one to three years.

INTEGRATIONThe universe of companies that we can invest in comes from countries with relatively progressive attitudes towards environmental and social protection and regulations that reflect this. Governance standards are, on the contrary, very variable across the continent and pose a particular risk in smaller companies. As a result we pay attention to the performance of the companies across all three areas with the greatest focus on governance.

We actively target companies where founders remain managers and often continue to have a controlling interest in the share capital. This is because it is our belief that founders usually take beneficial long term decisions for the business and are often exceptional managers. The quality of management is an important attribute in any investment and the team always meets with the company before investing and continues an ongoing dialogue when invested.

As smaller company investors we must acknowledge that the smallest companies do not have the resources to deliver best practice in all areas but that we need to see a willingness that as companies grow and thrive, they commit to investing to deliver on governance, environmental and social standards. We believe that it is important that the companies that we invest in apply the same standards to their activities outside Europe as they do to those at home.

The team believes that the quality of a company’s governance and accountability, as well as its management of its relationships with key stakeholders and its wider impact on the environment and society contribute to its long-term, sustainable profitability. The team therefore aims to integrate the consideration of material sustainability and accountability information into financial analysis and decision-making in a robust and credible way for the purposes of enhanced investment performance. This analysis is informed and assisted by MGI’s proprietary sustainability and accountability analysis framework called AIM, as well as knowledge and expertise from our in-house responsible investment and stewardship resources where required.

Integration happens at three stages of the investment decision-making process.

Sustainable companies within our universe. Smaller companies should offer more solutions than problems on issues such as climate change because of their inherent flexibility and lack of legacy. It is our belief that we can find attractive investments amongst companies that are prepared to embrace change or who are creating new markets through innovation. Investment opportunities come from the exceptional growth opportunities that some of these companies present and/or from the premium valuations they attract as scarce solutions attract capital at the expense of legacy industries that are struggling to adapt.

Go/No Go decision in research or portfolio inclusion: When the investment team researches a company for potential inclusion in its portfolios, it looks at the company through the AIM framework early in the process. If it sees material issues and risks that it would find difficult or impossible to reconcile, it would stop and exclude the company. If a company is excluded in this way the team ensures that it cannot re-enter the research in the future, allowing other stocks with more favourable governance and sustainability characteristics to enter the opportunity set.

Once a stock has been included in the portfolio, the team continues to monitor the portfolio for ESG issues using the AIM screen, voting recommendations and newsflow from sources such as brokers or activist investors. If issues arise that we would have considered unacceptable at the screening phase we will investigate further using external risk reports, the company’s own reporting on these issues via their annual report and other sources such as sell-side analysts. Following this we will seek clarity from the company and where necessary push for change through engagement and voting. If change is not forthcoming we will look to sell our investment in the company.In line with MGI’s policy, the investment team will not knowingly invest directly in securities of companies involved the manufacture,

development or trade of controversial weapons; the policy can be found on our website*. The investment team will also not knowingly invest in companies involved in the manufacture of tobacco products.

ENGAGEMENTAs long-term owners of companies, the team takes an active and engaged approach to managing and overseeing its investments. In addition to conducting desk research the team regularly speaks to company management teams, and often travels to meet management face-to-face. This plays an important part in the process of monitoring company performance in order to ensure that the investment case remains on track and identifying whether engagement is required to promote change or improve accountability.

In addition, the investment team uses AIM to further assist in the identification and prioritisation of engagement targets. This involves regular access to and assessment of AIM data, as well as desk research and exploratory conversations with a company in order to provide context to the data and to understand the precise nature of the issues. The team undertakes a formal quarterly review of the portfolio to identify whether any new issues have emerged that require engagement.

Where engagement is deemed necessary with an investee company the team will take a view as to the best approach for initiation and necessary level of escalation. Some issues, such as those related to governance, accountability and ownership are best addressed with the investee company’s board, whereas issues of strategy, operations and sustainability can be more fully addressed with its management, at least initially.

On a quarterly basis the team reviews how engagements are progressing and whether a change of strategy is required to achieve the intended improvements.

VOTINGMGI endeavours to vote all shares held by the team at every shareholder meeting. The only exception to this is where we might be restricted from voting by legal matters, such as power of attorney requirements, or operational challenges such as share blocking. Voting is overseen by MGI’s responsible investment and stewardship resources however the European Smaller Companies investment team is actively engaged in any contentious or adverse voting decisions.

MGI’s voting policy can be found within our accountability expectations document. However, the investment team is keenly aware that there is no one-size-fits-all approach to running a company, and so is always willing to listen to companies’ explanations as to why their arrangements are right in the context of their own strategies and situations. This is particularly important as the team has significant knowledge of its investee companies, and wants to make sure that its voting record also reflects its investment and engagement views of its investments. In this way it ensures that its voting is as integrated with the investment process as it can be and that its votes have maximum impact through engagement.

This can result in the policy being overridden, both in support of management where we believe this could be positive for promoting change, or against management when we believe strong signals need to be sent. Where the investment team is unable to come to a clear conclusion due to insufficient disclosure or resolutions that bundle multiple items together it will vote against the resolution. The investment team aims to follow up with all companies should it vote against at a shareholder meeting in the hope that it will not need to vote against management in the future.

RISK OVERSIGHTWith dedicated headcount, MGI’s investment risk function provides independent oversight of the sustainability and accountability characteristics of our portfolios, including those run by the European Smaller Companies team. This ensures that while the investment teams are responsible for the construction of their portfolios, we have a formal governance process in place to monitor and query exposure to ESG risks. This involves day to day interactions between investment risk and the investment teams as well as oversight through MGI’s Quarterly Investment and Risk Committee (QIRC), meaning that ESG is incorporated into established and formalised challenge and escalation governance structures.

PUBLIC POLICYWhere we identify systemic issues that affect the sustainability of the markets in which we invest we will, either directly or through membership associations, seek to influence policy to address those challenges. MGI’s European Smaller Companies investment team is covered by MGI’s central approach to public policy engagement, undertaken by our responsible investment and stewardship resources.


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GLOBAL EMERGING MARKETSThe Global Emerging Markets (GEM) investment team invests patiently for the long-term in reasonably priced shares of truly exceptional, quality businesses with strong, sustainable moats. It adopts a bottom up approach to investment with a bias towards quality, and tends to hold between 30 and 40 companies at any one time. The investment team typically invests with a three to five year outlook.

INTEGRATIONThe team believes that the quality of a company’s governance and accountability, as well as its management of its relationships with key stakeholders and its wider impact on the environment and society contribute to its long-term, sustainable profitability. The team therefore aims to integrate the consideration of material sustainability and accountability information into financial analysis and decision-making in a robust and credible way for the purposes of enhanced investment performance. This analysis is informed and assisted by MGI’s proprietary sustainability and accountability analysis framework called AIM, as well as knowledge and expertise from our in-house responsible investment and stewardship resources where required.

Integration happens at three stages of the investment decision-making process.

Go/No Go decision in research or portfolio inclusion: When the investment team researches a company for potential inclusion in its portfolios, it looks at the company through the AIM framework early in the process. If it sees material issues and risks that it would find difficult or impossible to reconcile, it would stop and exclude the company. If a company is excluded in this way the team ensures that it cannot re-enter the research process in the future, allowing other stocks with more favourable governance and sustainability characteristics to enter the opportunity set.

Where the investment team acknowledges risks are present but its expectation is for an improvement it can adjust its exposure to the issues in the following ways:

Adjusting cash flow forecasts and/or cost of capital: The team uses a proprietary discounted cash flow model as its primary valuation input. It is able to model different cash flow and cost of capital scenarios to account for both financial and AIM risks; to build a greater margin of safety the team would use a higher discount rate to account for material AIM risks in its valuation.

Position sizing: The team has a number of criteria when determining position sizing of stocks within the fund, including AIM considerations. The team will keep stock positions smaller than they would normally be if it feels that AIM risks are high but can be mitigated or reduced over time.

In line with MGI’s policy, the team will not knowingly invest directly in securities of companies involved the manufacture, development or trade of controversial weapons; the policy can be found on our website*. The team will also not knowingly invest in companies involved in the manufacture of tobacco products.

ENGAGEMENTAs long-term owners of companies, the team takes an active and engaged approach to managing and overseeing its investments. In addition to conducting desk research, the team regularly speaks to company management teams, and often travels to meet management face-to-face and to conduct site visits. This plays an important part in the process of monitoring company performance in order to ensure that the investment case remains on track and identifying whether engagement is required to promote change or improve accountability.

In addition, the team uses AIM to further assist in the identification and prioritisation of engagement targets. This involves regular access to and assessment of AIM data, as well as desk research and exploratory conversations with a company in order to provide context to the data and to understand the precise nature of the issues. The team undertakes a formal quarterly review of the portfolio to identify whether any new issues have emerged that require engagement.

Where engagement is deemed necessary with an investee company the team will take a view as to the best approach for initiation and necessary level of escalation. Some issues, such as those related to governance, accountability and ownership are best addressed with the board, whereas issues of strategy, operations and sustainability can be more fully addressed with management, at least initially.

On a quarterly basis the team reviews how engagements are progressing and whether a change of strategy is required to achieve the intended improvements. This can feed back into the valuation considerations described earlier in the section on integration to recognise any improvements or deterioration from the team’s original assessment. If an issue deteriorates to the extent that the team no longer believes engagement can be successful in improving a company’s management of it the team will consider the sale of the security.

VOTINGMGI endeavours to vote all shares held by the team at every shareholder meeting. The only exception to this is where we might be restricted from voting by legal matters, such as power of attorney requirements, or operational challenges such as share blocking. Voting is overseen by MGI’s responsible investment and stewardship resources; however the investment team is actively engaged in any contentious or adverse voting decisions.

MGI’s voting policy can be found within our accountability expectations document. However, the investment team is keenly aware that there is no one-size-fits-all approach to running a company, and so is always willing to listen to companies’ explanations as to why their arrangements are right in the context of their own strategies and situations. This is particularly important as the team has significant knowledge of its investee companies, and wants to make sure that its voting record also reflects its investment and engagement views of its investments. In this way it ensures that its voting is as integrated with the investment process as it can be and that its votes have maximum impact through engagement.

This can result in the policy being overridden, both in support of management where we believe this could be positive for promoting change or against management when we believe strong signals need to be sent. Where the investment team is unable to come to a clear conclusion due to insufficient disclosure or resolutions that bundle multiple items together it will vote against the resolution. The team aims to follow up with all companies should it vote against at a shareholder meeting in the hope that it will not need to vote against management in the future.

RISK OVERSIGHTWith dedicated headcount, MGI’s investment risk function provides independent oversight of the sustainability and accountability characteristics of our portfolios, including those run by the Global Emerging Markets team. This ensures that while the investment teams are responsible for the construction of their portfolios, we have a formal governance process in place to monitor and query exposure to ESG risks. This involves day to day interactions between investment risk and the investment teams as well as oversight through MGI’s Quarterly Investment and Risk Committee (QIRC), meaning that ESG is incorporated into established and formalised challenge and escalation governance structures.

PUBLIC POLICYWhere we identify systemic issues that affect the sustainability of the markets in which we invest we will, either directly or through membership associations, seek to influence policy to address those challenges. MGI’s Global Emerging Markets investment team is covered by MGI’s central approach to public policy engagement, undertaken by our responsible investment and stewardship resources.


GLOBAL EQUITIESThe objective of these funds is generally to deliver capital appreciation through investment in diversified portfolios of equity securities. The funds are managed using a systematic investment process, with stocks being assessed in terms of the attractiveness of their valuation, quality, price trends, stable growth prospects, sentiment and company management. In addition, other criteria such as expected risk, trading costs and liquidity are taken into consideration. The systematic nature of the investment process means that the funds can hold a large number of companies at any one time, with potentially short holding periods.

INTEGRATIONThe team seeks to be cognisant of the environmental, social and governance (ESG) characteristics of its funds. The full MSCI ESG data set, including overall ESG scores for each stock as well as pillars, themes and key issues, is uploaded into the team’s platform daily. Automated daily reports give the ESG rating distributions for each fund, and flag the most problematic stocks. Additionally, on a quarterly basis the investible universe is screened for companies that are in breach of UN Global Compact principles, or that have strongly negative ESG attributes.

Furthermore, on an ad hoc basis any company may be highlighted as a result of negative ESG news flows or related research and information received by the team. Whether through this channel or the regular screening processes, deeper dives may be undertaken to assess the issues, in particular whether they could cause the value of a stock to move due to matters not captured by the factors in the models currently. This can lead to the decision to remove the companies from the investible universe.

We believe that a number of our factors should implicitly reflect certain aspects of ESG performance, for example our company management component ought to capture some of the outcomes of good governance. Similarly, the ability of a company to grow consistently over the long-term, as captured by our sustainable growth factors, should intuitively reflect good management of ESG issues. However, the team has been undertaking extensive research into the potential benefits of incorporating specific ESG factors directly into its models, to complement the data already captured by the investment process. Subject to the outcome of a research project, the team expects to go live with an enhancement to the model to explicitly incorporate an ESG based component in the first half of 2020.

In line with MGI’s policy the investment team will not knowingly invest directly in securities of companies involved the manufacture, development or trade of controversial weapons; the policy can be found on our website*.

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ENGAGEMENTEngagement is often a long-term process, founded on building relationships between companies and investors that involves at times intensive dialogue between the two. Given the systematic approach taken to identifying investments for these funds, the investment time horizons and the potentially large number of companies held by the strategies, engagement is usually not practical. However, there are certain companies the investment strategies are more likely to hold at a material level over a longer period given their weighting in the index. While the precise exposure will vary over time, engagement is likely to be more applicable in these instances. Therefore at the investment team level we look to identify those holdings and, using our proprietary sustainability and accountability framework we call AIM to screen for candidates, select a number of companies where we deem there to be issues requiring engagement. The engagement is then undertaken by MGI’s responsible investment and stewardship resources. Additionally, if a held company that would also meet the longer holding period criterion, but which has not been previously identified for engagement, wishes to enter into dialogue with MGI we will consider adding it to the team’s’s engagement list.

Furthermore, if a company that is identified for engagement by another MGI investment team is also held by the Global Equities team, we will pool the holdings together for the purpose of engagement.

VOTINGWhere the funds hold shares in a company at the time of a shareholder meeting and are entitled to vote we endeavour to vote all shares. The only exception to this is where we might be restricted from voting by legal matters, such as power of attorney requirements, or operational challenges such as share blocking.

We will generally vote in line with MGI’s voting policy, which can be found in our Accountability Expectations document. Where the voting policy cannot be directly applied, requiring manual intervention from MGI, we are likely to follow the recommendation of our proxy advisor unless we have specific knowledge of the company through engagement or exposure via another investment team.

RISK OVERSIGHTWith dedicated headcount, MGI’s investment risk function provides independent oversight of the sustainability and accountability characteristics of our portfolios, including those run by the Global Equities investment team. This ensures that while the investment teams are responsible for the construction of their portfolios, we have a formal governance process in place to monitor and query exposure to ESG risks. This involves day to day interactions between investment risk and the investment teams as well as oversight through MGI’s Quarterly Investment and Risk Committee (QIRC), meaning that ESG is incorporated into established and formalised challenge and escalation governance structures.

PUBLIC POLICYWhere we identify systemic issues that affect the sustainability of the markets in which we invest we will, either directly or through membership associations, seek to influence policy to address those challenges. Global Equities is covered by MGI’s central approach to public policy engagement, undertaken by our responsible investment and stewardship resources.


GOLD AND SILVERWe aim to achieve maximum total return through investment in a diversified portfolio of securities of companies engaged in activities related to the mining and production of gold and silver. We have a unique combination of country and technical expertise which enables us to conduct in-depth, bottom-up analysis of companies, taking account of the full range of potential risk and opportunity factors. We take a long-term view on valuation, looking to construct models covering performance between five to 10 years, and typically hold a portfolio of 35-40 stocks.

INTEGRATIONWe are highly aware that the mining sector can be particularly exposed to sustainability issues, which can have a material impact on companies and their stakeholders. Some elements of this can relate to local operating and governing standards. We filter our investment universe to avoid jurisdictions where such issues tend to be more pronounced and difficult to anticipate. Our preference is to manage a concentrated portfolio of holdings in companies whose assets are in countries where we understand the political and social landscape.

Desktop research from our mining engineer with industry and financial experience improves our understanding of the mining sector and the impact operational risk has on financial performance. Our investment team’s Responsible Investment Charter (available on our website*) was developed to address the specific sustainability challenges that relate to our investible universe, in combination with MGI’s proprietary sustainability and accountability analysis framework called AIM provides a framework for topics we consider as part of our investment process for integration. The framework helps us to identify and avoid companies with poor operational practices and ESG impacts, which may result in lower revenue and higher costs over the long term. Combining our industry knowledge with a fundamental approach to valuation enables us to effectively integrate consideration of ESG issues into a company’s valuation model.

We undertake a formal review of the sustainability and accountability profiles and broader knowledge of the companies in our investible universe on a quarterly basis to ensure that we can identify issues at an early stage when researching potential new stocks to invest in. Our

position sizing is primarily based on market capitalisation and expectations of financial performance. But in certain situations when our analysis leads to the recognition of material ESG issues that are not reconcilable with our valuation, we may take the decision not to invest or to sell the holding.

ENGAGEMENTWe implement a quarterly review of the portfolio to identify material ESG issues on which to engage. Improvements in corporate behaviour can result in a reduction in a company’s risk profile and more confidence placed in management’s ability to execute. We engage primarily through meetings, conference calls and industry events. Where possible, we are prepared to visit projects to improve our understanding of operational risk and the complementary and competing stakeholder interests before we invest. When we discover corporate behaviour that goes against our Responsible Investment Charter, we seek to increase our awareness and understanding of the underlying issues. We then engage with management to address these issues so that shareholder value and stakeholder interests can be protected. In our experience, companies in our sector welcome this guidance as they are often unaware of the importance of ESG to institutional investors. If through disclosure and engagement we are not able to gain comfort that these risks are being sufficiently managed, and in particular where we do not believe these risks to be adequately reflected in the market’s valuation of the business, we might choose to reduce our position or sell our holding entirely. Validation of our approach is ultimately achieved through avoiding share price underperformance.

VOTINGWe consider voting to be a core responsibility and endeavour to vote all shares held at every shareholder meeting. Voting is overseen by MGI’s responsible investment and stewardship resources; however the Gold & Silver investment team is actively engaged in any contentious or adverse voting decisions. MGI’s voting policy can be found within our accountability expectations document. In some cases, we are prepared to override our voting policy if our analysis and engagement highlights the need to be pragmatic. These special situations apply most often to smaller companies where barriers to obtaining board representation, combined with industry knowledge, may be high. Considerable benefit is derived from engaging with companies before the vote to explain our position and hear the counter-argument. Where we are unable to engage before the vote, we aim to follow up with all companies to explain our reasoning.

RISK OVERSIGHTWith dedicated headcount, MGI’s investment risk function provides independent oversight of the sustainability and accountability characteristics of our portfolios, including those run by the Gold and Silver team. This ensures that while the investment teams are responsible for the construction of their portfolios, we have a formal governance process in place to monitor and query exposure to ESG risks. This involves day-to-day interactions between investment risk and the investment teams as well as oversight through MGI’s Quarterly Investment and Risk Committee (QIRC), meaning that ESG is incorporated into established and formalised challenge and escalation governance structures.

PUBLIC POLICYWhere we identify systemic issues that affect the sustainability of the markets in which we invest we will, either directly or through membership associations, seek to influence policy to address those challenges. MGI’s Gold and Silver team is covered by MGI’s central approach to public policy engagement, undertaken by our responsible investment and stewardship resources.

* https://www.merian.com/gb/en/institutional/insights/responsible-investment-charter-merian-gold-and silver-fund/

UK LARGE CAPThe team aims to achieve long-term capital growth through investment in concentrated portfolios of predominantly large-cap UK equities. Extensive fundamental research is core to the success of these strategies, alongside a top-down perspective of the macro-economic investment environment. A monthly strategy meeting establishes the central scenario for the medium-term macro backdrop, the risks to it and the implications for sectoral or thematic positioning. This document describes the approach applied to the Merian UK Alpha funds managed by MGI’s UK Large Cap Equities investment team. Other funds managed by the team derive core holdings from this investment process.

Fundamental research identifies industry characteristics, companies’ competitive position within it, balance sheet, profitability and cash-flow, alongside returns on capital. Management ability and track record are critical and we meet with them frequently.

Our investment time horizon is long-term: we look to invest for three to five years and more, with low turnover. Our portfolio is typically around 35 holdings, comprising both growth and value situations, to blend the best mix of stocks offering future capital growth, via different sources of alpha.

INTEGRATIONThe team believes that the unbridled pursuit of shareholder value above all other stakeholders is not sustainably successful. We fully endorse the UK Corporate Governance Code’s view that boards must establish a company’s purpose, values and strategy, generating value for shareholders and contributing to wider society. We expect management teams and boards to be able to explain how they have taken the interest of all the company’s stakeholders into account in their decision-making. The truly sustainably successful business will work with employees, customers and suppliers effectively, will manage its resources and environmental impact carefully, will contribute positively to the communities within which it operates and sustain a societal ‘licence to operate’.

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Through our analysis and our meetings with companies, we strive to build deep understanding of businesses. The team embeds consideration of material sustainable, governance and stakeholder management information into our work. We have a proprietary sustainability and accountability analysis framework called AIM, which captures the profiles of our potential investment universe. This enables us to identify any areas of possible weakness in a company ahead of investment, enabling us to raise any concerns with management in our due diligence process. On a quarterly basis, the team meets formally with our responsible investment and stewardship team to review the AIM profiles of both the investment universe and the portfolio.

We fully endorse the principles of the UN Global Compact and would expect investee companies to meet its criteria, although accept that engagement with companies may demonstrate that past failings are being addressed. There are companies within our investment universe in which we would never invest as they are unlikely to meet our responsible investment criteria. Companies may be listed in London but operate in geographies where we are uncomfortable about assurances regarding working practices, ethical behaviour or levels of disclosure. Unmanageable conflicts of interest between owner-managers and minority shareholders would be another example. For other companies, we may factor in a higher cost of capital or lower valuation to reflect financial or reputational risks arising from our responsible business analysis. This may also be reflected in lower position sizes in holdings.


ENGAGEMENTMeeting management and board members regularly is integral to our process. We would not invest in a company without having first met management. Management ability, track record, motivation and incentives are critical. Purpose, governance, board composition, succession planning and cultural ‘tone from the top’ distinguish the sustainably successful. We engage with chairs, senior independent directors and chairs of remuneration, nominations and audit committees as appropriate, alongside regular dialogue with management. As long-term investors, in all our engagement, we look to build trust and mutual understanding.

We fully support the Code’s view that it is in the best long-term interests of companies to take into account all its stakeholders in developing the business. Managing environmental impact, employee relations including health and safety, training, career development and diversity are important issues. In all areas, we are looking to establish that the company’s interests are aligned with those of our clients.

Companies and investors agree that too much time is spent by both sides on issues of remuneration alone, but we firmly believe that the right incentive arrangements affect behaviours and stakeholder relations. We prefer simple, long-term structures such as restricted shares, which align management and shareholders in focusing on the long-term sustainable success of the company. We dislike LTIPs, with complex scorecards and uncertain outcomes relative to managements’ genuine contribution to stakeholders’ expectations.

Our AIM portfolio analysis will identify those holdings with weaker responsible investment profiles, and we will actively engage with boards and management to discuss our concerns. We firmly believe active engagement can lead to improved behaviours and results. We are also prepared to be patient in seeing companies improve over time, but ultimately we have to make a judgement on the pace of progress, valuation and management’s embracing change.

We engage directly with companies, but are also members of the Investor Forum and do participate in collective engagement with others through the Investor Forum.

VOTINGWe exercise our voting rights at every opportunity where practicable. All key topics will be considered and voted on: board structure, audit and accounts, remuneration, capital structure, shareholder rights and dilution, corporate transactions and shareholder proposals.

We prefer to engage with companies on any of these topics in advance of a voting opportunity to exchange views and provide our perspective. We understand that shareholders differ and boards have to make a judgement as to what they believe to be in the best interest of the company. But we will vote against proposals with which we do not agree, striving to explain why in advance of the vote itself. We will always look to maintain a constructive relationship with companies throughout all our engagement and voting activities.

Whilst we use a proxy voting agency to implement our voting policy, the policy and voting decisions are ours not those of the proxy agency.

RISK OVERSIGHTWith dedicated headcount, MGI’s investment risk function provides independent oversight of the sustainability and accountability characteristics of our portfolios, including those run by the UK Large Cap Equities team. This ensures that while the investment teams are responsible for the construction of their portfolios, we have a formal governance process in place to monitor and query exposure to ESG risks. This involves day to day interactions between investment risk and the investment teams as well as oversight through MGI’s Quarterly Investment and Risk Committee (QIRC), meaning that ESG is incorporated into established and formalised challenge and escalation governance structures.

PUBLIC POLICYWhere we identify systemic issues that affect the sustainability of the markets in which we invest we will, either directly or through membership associations, seek to influence policy to address those challenges. Government departments, regulators, trade associations

and other agencies often seek the views of interested parties on issues affecting companies and the investment industry and we frequently respond to such calls. MGI’s UK Large Cap Equities team is covered by MGI’s central approach to public policy engagement, undertaken by our responsible investment and stewardship resources.


UK SMALL AND MID CAPThe investment process of the UK Small and Mid-Cap cap investment team takes account of and is responsive to anticipated changes in economic and market conditions. In order to do this we aim to blend top-down and-bottom up analysis and are conceptually prepared to invest in both value and growth orientated companies as appropriate in order to generate consistent returns.

At a stock level, we seek to identify companies that we think can outperform, typically because in our view they exhibit at least one of the following three characteristics: the ability to deliver sustained above market average rates of earnings growth, the ability to deliver positive earnings surprise, and the ability to be re-rated relative to the market.

Our judgements are informed by what we consider to be a high level of vested knowledge derived from a nine-strong team, many of whose members have more than two decades worth of experience in the UK Small and Mid-Cap space. In performing this work, significant emphasis is placed on engagement with management teams, with hundreds of company meetings undertaken each year. We also engage extensively with the sell side, with a particular focus on the composition of and rationale for forecasts and their underlying assumptions.

INTEGRATIONThe team believes that a company’s governance, impact on the environment and relationships with key stakeholders can have a material impact on its long-term viability and therefore investibility.

Having comprehensive governance structures and processes as well as appropriately qualified personnel in key positions should enhance the scope for smaller and mid-size businesses to develop into larger quoted entities. We fully endorse the principles of the UK Corporate Governance Code, and while we acknowledge the needs for pragmatism with smaller companies we still expect high standards of governance at investee companies to support their growth in a sustainable manner.

While our investment universe comprises smaller companies, these companies can still be exposed to important sustainability risks and opportunities that can have material impacts on value. Indeed, as corporate culture is set at an early stage, the relationships with key stakeholders such as customers, the workforce and suppliers at this stage of a company’s development can be fundamental to its long-term success. Effective governance and a healthy corporate culture should, ceteris paribus, contribute positively to companies exhibiting the positive characteristics that we would typically look for in investee companies.

With smaller companies, the availability and quality of data related to responsible investment can be challenging. We have recently adopted MGI’s proprietary sustainability and accountability framework called AIM into our screening and portfolio review processes. This enables us to identify potential issues prior to investment and may help to highlight developing issues in portfolio holdings that we can address through more direct engagement.

Even where data might not be available, our wider process is meeting-intensive and relies on a very significant level of contact with management teams; this dynamic and the level of vested knowledge across what we consider to be a well-resourced and experienced investment team means that we should be able to identify issues before investment, when researching potential new purchases. This can be augmented by advice on the materiality of issues from our responsible investment and stewardship team.

As a base expectation of corporate behaviour, we would not knowingly invest in businesses undertaking activities that are not legal or fall short of recognised consumer, labour or environmental standards in a given jurisdiction. We recognise that a company’s licence to operate extends beyond legality, and endorse and monitor company performance against the UN Global Compact’s expectations on the protection of human rights, labour rights and the environment as well as the eradication of bribery and corruption.

Given the relatively small size and early stage nature of some of the companies in which the team invests, it may prove difficult, but where practicable we would want to see genuinely independent directors serving on company boards. We aim to be particularly vigilant around any related party transactions, which can be more prevalent in a smaller company setting than would be the case with larger companies.

Where we consider a company to be fundamentally investible but where responsible investment issues may nonetheless be elevated and where we conclude that engagement cannot mitigate or resolve them, we may hold that position in lower unit size that would be the case if such issues did not exist. We may conclude that such an investment could be expected to sustain a lower P/E ratio or a higher free cash flow yield. Where we take the view that there are material ESG risks that cannot be resolved through engagement and/or where the board resists or fundamentally disagrees with our position, we may not enter or, if already invested, look to exit that position.


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ENGAGEMENTAs noted above, our process relies heavily on maintaining a detailed and consistent level of interaction with investee companies. Typically, we will meet with executive management of all investee companies prior to taking a holding; should this not prove possible, we would expect to meet with that company shortly after investment. We also tend to meet with executive management twice a year to discuss both interim and preliminary results. We also regularly meet boards to discuss matters such as strategy and governance, which allows us to engage at the highest level and, where necessary, push for accountability. We identify issues that require engagement in a range of ways. On a quarterly basis we undertake a review of our portfolios for any emerging responsible investment issues and to review existing engagement progress. This is informed by many sources including the AIM data, our knowledge of the companies and regular meetings with them, news flows and market research. We place a particular focus on any new holdings or positions that have substantially increased over the period so as to be able to initiate engagement early on in our period of ownership if necessary.

Where we do identify issues we will take a view as to the level and intensity at which dialogue is required. This will in part be based on the nature of the issue, and therefore at which level within a business it needs to be addressed, as well as the expected challenge in arriving at the change required. As long-term owners of companies we seek to build and maintain constructive relationships with the companies in which we invest, and are always mindful of the need for pragmatism. This is particularly the case for smaller companies, where supportive, successful engagement can achieve significant and meaningful change for the benefit of the company, its investors and its wider stakeholders. That said, where we do identify issues and we do not believe that the company’s response is sufficient or proactive following engagement we will push for accountability where appropriate, including at the highest levels on the board.

VOTING MGI endeavours to vote all shares held by the team at every shareholder meeting. The only exception to this is where we might be restricted from voting by legal matters, such as power of attorney requirements, or operational challenges such as share blocking. Voting is overseen by MGI’s responsible investment and stewardship resources, however the UK Small and Mid-Cap investment team is actively engaged in any contentious or adverse voting decisions.

MGI’s voting policy can be found within our accountability expectations document. However, the investment team is keenly aware that there is no one-size-fits-all approach to running a company, and so is always willing to listen to companies’ explanations as to why their arrangements are right in the context of their own strategies and situations. This is particularly important as the team has significant knowledge of its investee companies, and wants to make sure that its voting record also reflects its investment and engagement views of our investments. In this way it ensures that its voting is as integrated with the investment process as it can be and that our votes have maximum impact through engagement.

This can result in the policy being overridden, both in support of management where we believe this could be positive for promoting change or against management when we believe strong signals need to be sent. Where the desk is unable to come to a clear conclusion due to insufficient disclosure or resolutions that bundle multiple items together it will vote against the resolution. The investment team aims to follow up with all companies should it vote against at a shareholder meeting in the hope that it will not need to vote against management in the future.

RISK OVERSIGHT With dedicated headcount, MGI’s investment risk function provides independent oversight of the sustainability and governance characteristics of our portfolios, including those run by the UK Small and Mid-Cap team. This ensures that while the investment teams are responsible for the construction of their portfolios, we have a formal governance process in place to monitor and query exposure to ESG risks. This involves day to day interactions between investment risk and the investment teams as well as oversight through MGI’s Quarterly Investment and Risk Committee (QIRC), meaning that ESG is incorporated into established and formalised challenge and escalation governance structures.

PUBLIC POLICY Where we identify systemic issues that affect the sustainability of the markets in which we invest we will, either directly or through membership associations, seek to influence policy to address those challenges. The UK Small and Mid-Cap team is covered by MGI’s central approach to public policy engagement, undertaken by our responsible investment and stewardship resources.


MGI’S RESPONSIBLE BUSINESS PRINCIPLESWe recognise that in order to fulfil our purpose, as a business we must behave in a responsible way, building and maintaining positive relationships with our key stakeholders.

OUR CLIENTSIt goes without saying that our clients make our business what it is; our simple ambition is to provide the best possible investment products to meet their current and future needs, and deliver value for money. In pursuit of this ambition, we place them at the heart of the process of developing and evolving our products, and we look to partner with them where possible to ensure we continue to deliver on their expectations. We believe our structure, which eschews a “house view” and the role of chief investment officer – while maintaining an extremely robust risk management framework – enables our fund managers to invest in the ways they genuinely believe best to deliver the outcomes our clients expect.

We provide clear information on costs, charges and performance at the outset and throughout the life of our products. Our clients’ funds are handled securely, and we are committed to providing the quality of service they expect.

We understand the importance of investing alongside our clients to align our long-term interests. A significant portion of our fund managers’ remuneration is invested directly in their own and others’ funds, and we encourage all staff likewise to invest. We proactively manage conflicts of interest that might occur so as best to ensure that we will always prioritise those of our clients over our own.

OUR COLLEAGUESAs our most important asset we are committed to providing our colleagues with a working environment that allows them to perform their jobs to the best of their abilities, and in turn to provide the best outcomes for our clients. Central to this is maintaining an open, friendly, accountable, and ambitious culture, as well as providing opportunities for professional development and support. We maintain an entirely open-plan office arrangement to promote collaboration and teamwork. We take a dim view of egos and office politics.

We place significant emphasis on the importance of maintaining and improving the diversity of our workforce, enabling us both to better support and challenge each other, and bring fresh and innovative ideas into the business. We are proud, for example, that our executive committee currently has as a greater number of women members than men, reflecting our belief that diversity strengthens the business, and differentiating us from many of our peers.

A culture of accountability and empowerment enables the firm to attract and retain the very best investment professionals, allowing them freedom to perform within a strong governance framework to meet clients’ needs.

OUR INVESTMENTSWe never lose sight of the fact that we are a steward of our clients’ assets and strive to fulfil the responsibility that entails to the best of our abilities. We are committed to developing an investment-led, value based approach to responsible investment and stewardship. This involves, in the way most applicable for our various investment processes, seeking to incorporate material responsible investment topics in our investment analysis.

Furthermore, we know our responsibilities extend well beyond the investment decision. For this reason we seek to engage with companies to support and improve performance on important aspects of their strategy, finance, governance and sustainability, and exercise our voting rights at all shareholder meetings to promote accountability.

OUR SOCIETYWe want to exemplify the behaviours we expect of the companies we invest in wherever practicable. This means acting transparently and with integrity, looking after our colleagues, treating our customers and suppliers fairly, managing our environmental impact and contributing to the communities in which we operate. We support a number of initiatives and charities related to our local communities, including those that provide both support and opportunity to disadvantaged young people.

We strive to maintain positive and constructive relationships with regulators in the countries where we operate, and commit to communicating openly and transparently with them. Additionally, we work to ensure that the landscape for long-term savers is as positive as it can be by engaging in key policy consultations.

OUR OWNERSWe believe that operating in a way that manages our relationships with these key stakeholders responsibly is the most effective way to create sustainable value and returns for our owners. This includes our staff, many of whom also share in the success of our business through our equity participation scheme, in addition to investing in our funds alongside our clients. In this way, we believe we best ensure alignment of priorities between our business, our staff, our clients and our owners, supporting our and their long-term success.

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CROSS-REFERENCING WITH THE PRINCIPLES FOR RESPONSIBLE INVESTMENT AND THE UK STEWARDSHIP CODE We are proud to be members of the UN-backed Principles for Responsible Investment as well as a current Tier 1 signatory to the UK Stewardship Code. Below we cross-reference the principles from both initiatives to help readers identify which sections of this report relate to them.

PRINCIPLES FOR RESPONSIBLE INVESTMENT

Principle Report section

1 We will incorporate ESG issues into investment analysis and decision-making processes.

Integration, Risk oversight, Case studies, Responsible investment philosophies

2 We will be active owners and incorporate ESG issues into our ownership policies and practices.

Engagement, Voting, Case studies, Responsible investment philosophies

3 We will seek appropriate disclosure on ESG issues by the entities in which we invest.

Engagement, Case studies

4 We will promote acceptance and implementation of the Principles within the investment industry.

Public policy

5 We will work together to enhance our effectiveness in implementing the Principles.

Engagement, Public policy, Case studies

6 We will each report on our activities and progress towards implementing the Principles.

Entire report

UK STEWARDSHIP CODE

Principle Report section

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.

Our reason for being, Introduction from our chief executive officer, Our responsible investment strategy and governance

2 Signatories’ governance, resources and incentives support stewardship.

Our responsible investment strategy and governance

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


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

Public policy

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


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


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

Integration, Engagement, Risk oversight, Case studies, Responsible investment philosophies

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


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

Engagement, Case studies, Responsible investment philosophies

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

Engagement

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

Engagement, Case studies, Responsible investment philosophies

12 Signatories actively exercise their rights and responsibilities. Voting

REFERENCES1 PRI, About the PRI https://www.unpri.org/pri/about-the-pri

2 Boston Consulting Group, Global Asset Management 2019: Will These ’20s Roar?: https://www.bcg.com/en-gb/publications/2019/ global-asset-management-will-these-20s-roar.aspx

3 ICGN, Global Stewardship Codes Network: https://www.icgn.org/policy/global-stewardship-codes-network

4 PRI, Regulation map: https://www.unpri.org/sustainable-markets/regulation-map

5 The Thinking Ahead Institute, The world’s largest fund managers – 2019: https://www.thinkingaheadinstitute.org/en/Library/Public/ Research-and-Ideas/2019/10/P_I_500_2019_Survey

6 Schroders, Global Investor Study 2018: https://www.schroders.com/en/hk/retirement/insights/global-investor-study/2018-findings/ sustainability/

7 Morgan Stanley, Sustainable Signals – new data from the individual investor: https://www.morganstanley.com/pub/content/dam/ msdotcom/ideas/sustainable-signals/pdf/Sustainable_Signals_Whitepaper.pdf

8 CNBC, UBS reports millennials could be worth up to US$24 trillion by 2020: https://www.cnbc.com/2017/06/23/ubs-millennials- worth-24-trillion-by-2020.html

9 Morgan Stanley, Sustainable signals – asset owners embrace sustainability: https://www.morganstanley.com/assets/pdfs/sustainable- signals-asset-owners-2018-survey.pdf

10 UNFCCC, The Paris Agreement: https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement

11 World Economic Forum, Chart of the day: These countries create most of the world’s CO2 emissions: https://www.weforum.org/ agenda/2019/06/chart-of-the-day-these-countries-create-most-of-the-world-s-co2-emissions/

12 United Nations, Sustainable development goals: https://sustainabledevelopment.un.org/?menu=1300

13 Ethical Corporation, 1.5C pledge from 87 global companies fuels hope of bending emissions curve at Climate Week: http:// ethicalcorp.com/15c-pledge-87-global-companies-fuels-hope-bending-emissions-curve-climate-week

14 UK Government, UK becomes first major economy to pass net zero emissions law: https://www.gov.uk/government/news/uk- becomes-first-major-economy-to-pass-net-zero-emissions-law

15 PRI, What is the inevitable policy response: https://www.unpri.org/inevitable-policy-response/what-is-the-inevitable-policy- response/4787.article

16 Climate Action Tracker, Temperatures: https://climateactiontracker.org/global/temperatures/

17 UN Environment Programme, Emissions Gap Report 2019: https://wedocs.unep.org/bitstream/handle/20.500.11822/30797/ EGR2019.pdf?sequence=1&isAllowed=y

18 World Bank, Carbon Pricing Dashboard: https://carbonpricingdashboard.worldbank.org/map_data

19 BNY Mellon, Climate change and artificial intelligence seen as risks to investment asset allocation, finds new report by BNY Mellon Investment Management and CREATE-Research: https://www.bnymellon.com/us/en/newsroom/news/press-releases/climate-change- and-artificial-intelligence-seen-as-risks-to-investment-asset-allocation-finds-new-report-by-bny-mellon-investmen.jsp

20 PRI, Forecast Policy Scenario: Equity Markets Impacts: https://www.unpri.org/inevitable-policy-response/forecast-policy-scenario- equity-markets-impacts/5191.article

21 UNA-UK, Filling the finance gap: https://www.sustainablegoals.org.uk/filling-the-finance-gap/

22 Business Commission, Better business, Better World: http://report.businesscommission.org/report

23 Global Sustainable Investment Alliance, 2018 Global sustainable investment review: http://www.gsi-alliance.org/wp-content/ uploads/2019/06/GSIR_Review2018F.pdf

24 FCA, Climate Change and Green Finance: summary of responses and next steps - https://www.fca.org.uk/publication/feedback/ fs19-6.pdf

25 Investor Agenda, Global Investor Statement to Governments on Climate Change: https://theinvestoragenda.org/focus-areas/policy- advocacy/

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ADDITIONAL DISCLOSURES REQUIRED BY THE SHAREHOLDER RIGHTS DIRECTIVE II How our investment strategy and its implementation contributes to the medium to long-term performance of the assets of the asset ownerMerian Global Investors (MGI) is a client-focused organisation, committed to delivering innovative investment solutions, strong performance and top-quality service. A culture of accountability and empowerment enables the firm to attract and retain the very best investment professionals, allowing them freedom to perform within a strong governance framework to meet clients’ needs.

The company’s investment approach is based on the view that talented managers will achieve strong returns for clients if they have the appropriate freedom to use their own proven processes. MGI does not impose a single house style or view on its investment teams, but instead allows them a high degree of independence whilst ensuring that they work within the company’s robust risk management and compliance framework.

THE KEY, MATERIAL MEDIUM TO LONG-TERM RISKS ASSOCIATED WITH THE INVESTMENTSKey Investor Information Documents (KIIDs) are produced for every available share class within each fund, and they include a risk and reward profile rating. The calculated risk and reward category shown on the KIIDs uses a method of calculation derived from EU rules. It is based on the rate at which the returns of the Fund have moved up and down in the past (i.e. volatility) and is not a guide to the future risk and reward category of the Fund. The category shown is not a target or guarantee and may shift over time. KIIDs are reviewed on at least an annual basis.

PORTFOLIO COMPOSITIONPortfolios are constructed in line regulatory requirements (where applicable). For example, UCITS funds are constructed in line with the UCITS guidelines. Such regulatory requirements will be outlined in the respective prospectus for each fund, available at www.merian.com.

TURNOVERThe turnover of the fund depends greatly on the investment style and strategy. Please refer to the section “Responsible investment philosophies” above for further information.

TURNOVER COSTThe turnover cost details can be found in the European PRIIPs Template (EPT), a copy of which is available upon request by emailing [email protected].

This statement is reviewed annually and updated as necessary.

Updated on 31 December 2019.

Past performance is not a guide to future performance and may not be repeated. Investment involves risk. The performance data does not take account of the commissions and costs incurred on the issue and redemption of shares. The value of investments and the income from them may go down as well as up and investors may not get back any of the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rate changes may cause the value of overseas investments to rise or fall.

This communication is issued by Merian Global Investors (UK) Limited (“Merian Global Investors”), Millennium Bridge House, 2 Lambeth Hill, London, United Kingdom, EC4P 4WR. Merian Global Investors is registered in England and Wales (number: 02949554) and is authorised and regulated by the Financial Conduct Authority (FRN: 171847). This communication is for information purposes only. Nothing in this communication constitutes financial, professional or investment advice or a personal recommendation. This communication should not be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the document. Any opinions expressed in this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or companies within the same group as Merian Global Investors as a result of using different assumptions and criteria. In Hong Kong this communication is issued by Merian Global Investors (Asia Pacific) Limited. Merian Global Investors (Asia Pacific) Limited is licensed to carry out Type 1 and Type 4 regulated activities in Hong Kong. This communication has not been reviewed by the Securities and Futures Commission in Hong Kong. In Singapore this document is issued by Merian Global Investors (Singapore) Pte Limited, which is not licensed or regulated by the Monetary Authority of Singapore (“MAS”) in Singapore. Merian Global Investors (Singapore) Pte Limited is affiliated with Merian Global Investors. Merian Global Investors is not licensed or regulated by the MAS. This document has not been reviewed by the MAS. In Switzerland this communication is issued by Merian Global Investors (Schweiz) GmbH, Schützengasse 4, 8001 Zürich, Switzerland. This communication is for investment professionals only and should not be relied upon by private investors. Models constructed with Geomag. MGI 02_20_0028

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