RESPONSIBILITY MATTERS

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1 RESPONSIBILITY MATTERS Royal London Asset Management ASSET MANAGEMENT Royal London Asset Management (RLAM) is committed to being a responsible investor. This means being a good steward of assets and promoting responsible investment with other stakeholders. The aim is to generate sustainable, risk-adjusted returns that reflect a wider understanding of what will drive economic performance in the future. As part of that commitment RLAM seeks to understand environmental, social and governance risks and opportunities within the investment process. To achieve this we engage with companies and industry regulators to understand the issues and to promote best practice. FUND MANAGER VIEW Mike Fox Head of Sustainable Investments The Growing Acceptance of Sustainable Investing In 200, when the current management team took over the RLAM sustainable funds, assets were approximately 90m. At the end of the first quarter of 2017 they are now over 1.bn, an increase of 1444%*. In that time the UK FTSE All-Share Index has risen 88%**, so from that we can conclude the majority of the growth in assets has come from new investors and strong investment performance. Over the last 14 years we have noticed a gradual but persistent growing acceptance and respect for the principles by which sustainable investors manage money. Rightly, the debate about how we invest our money today in a way that improves what we leave behind for future investors has grown. The rise of the conscience consumer has been a known trend for many years, now investors are becoming equally aware of their responsibilities. This reflects a number of things; however two stand out to us. The first is that the end-consumer of investment products is becoming more sustainably aware. Whether through their pension fund, ISAs or other investment vehicle, fund managers are increasingly being asked to represent the views of their customers. Millennials - those aged are the most socially aware consumers there has ever been, and they quite rightly expect their investments to reflect their views. This generational shift, which we expect to continue for many years to come, suggests continued growing demand for a more sustainable approach to investing. The second factor is that investing sustainably actually can improve investment performance. As can be seen from the RLAM sustainable funds, integrating environmental, social and governance (ESG) considerations can result in investment performance far superior to those who choose not to. This shouldn t be a surprise. Only investing in companies with good corporate governance (with appropriate remuneration policies and board structures) and due consideration for their social and environmental impact should be common sense, sadly it is more apt to call this uncommon sense. Strong ESG performance is an effective proxy for strong management and a key criterion for any investment. So, maintaining focus on these factors is additive to an investment process. We expect the trend towards greater acceptance of sustainable investing, due to both client demands and better investment performance, to continue. Integrating both financial and ESG considerations into investment processes requires significant expertise and experience. Putting all of this together results in differentiated, value-add and market relevant products such as RLAMs sustainable funds. * Source: RLAM as at 1 March 2017 **Source: Bloomberg 1 November March 2017

2 THE VIEW FROM RLAM A View from Inside: Insight into the agenda of our quarterly Advisory Committee Gail Counihan Responsible Investment Analyst Our first Advisory Committee meeting of the year saw us revisiting some established issues, as well as delving into new topics via the expertise and experience of our committee members. The unique perspective afforded when we view the same issue through different lenses continues to strengthen our investment decision-making process. Technology in China is one of the topics that we revisited. China has long been known to be a rapidly growing country but it s quite something to consider that they reduced their extreme-poverty rate from 84% to 10% between 1980 and the current day. A number of contributing factors mean that this area is evolving even faster than we initially thought, leading us to believe that we need to establish a wider framework for appraising the market as a whole, rather than adopting a company by company approach. Made in China 2025 the government initiative to comprehensively upgrade Chinese industry, the quality of innovation and the number of acquisitions coming out of the country mean that our expectations of China s trajectory need revising. Chinese car makers were responsible for over 40% of all electric vehicle (EV) production in a figure that stood at 6% in 201*. China s share of the plug-in EV market now exceeds that of the USA and Europe. As an investment team, if we believe in the transformational impact that EVs can have on global carbon emissions, we need to arm ourselves sooner rather than later with a robust framework for how we appraise the governance of Chinese companies. The next topic that we tabled was Genetic Modification. An area historically shrouded in public distrust, the case for social progress is overwhelmingly clear. The inherent challenge in the investment decision process is finding companies where that genuine social progress prevails. This requires a framework for appraisal that goes over and above our normal emphasis on governance we like to see an independent scientific board, removed from commercial incentive. Companies leading in this space have independent advisors to ensure that the change to Key Performance Indicators (KPI) that are used focus on realities, like what growers are doing, and the impact of these products on the environment. Transparency is important to these companies they cannot afford to be naïve about the importance of social license. Acquiring and retaining social license in an industry riddled with mistrust won t happen by accident. As always, we very rarely deal with absolutes in reality. There is no perfect company, most trends have good and bad ramifications and very seldom do we have a situation where the same benefit accrues to everyone. This is the reason why our subjective and qualitative approach to analysis allows us to view the world and potential holdings in a very unique way. *Source: CleanTechnica January 2017

3 THE VIEW FROM RLAM Unilever vs Kraft Heinz: the battle between the long and short term Mike Fox - Head of Sustainable Investments In February this year, Kraft Heinz stunned investors and the management of Unilever by launching a bid for the company. At $14bn it was one of the largest bids for a UK company ever seen. Although the offer, with our support, was rejected by Unilever and the bid fell through, what followed was a fascinating and useful debate about the two cultures of Unilever and Kraft Heinz and how sustainability should be viewed. Unilever is perhaps one of the most sustainable companies we have ever come across. Its products, which are consumer goods in the areas of food, household and personal care, are resource intensive both in the way they are manufactured and in the way they are used. The fact that Unilever engineers sustainability into its products, by considering their environmental and social impact when designing them, has allowed them to reduce their environmental impact markedly in recent years. They also take a long-term view as to relationships with their suppliers, often choosing to give smaller suppliers better terms to ensure their long-term success. Both these initiatives are admirable but they come at a cost. Unilever makes less profit than some of its peers who choose not to go down this path. Kraft Heinz is one of them. Kraft Heinz, which is backed by Warren Buffett and a Brazilian private equity firm G, is known to be an aggressive cost cutter. They have had tremendous financial success in buying mature brands and franchises then introducing a business management tool called zero based budgeting (ZBB). ZBB asks a business to justify everything it spends money on, on an annual basis. It makes no assumption that what has been spent in the past should be spent in the future. This tool has allowed Kraft Heinz to become significantly more profitable than Unilever. But it is also arguably contradictory to a long-term, sustainable agenda. Although we will never know for sure, it is possible Unilever s sustainable culture and philosophy would not have survived a takeover. So who is right and who is wrong? What is interesting is that Unilever has been a strong investment. This suggests, as we believe, that sustainability and long-term thinking are, rather than a detriment to investment returns, a benefit to them. To be fair, Kraft Heinz has also done well for its investors who have seen short-term profits go up more than expected. Time will, of course, tell but our view is that taking a long-term, sustainable approach to investing and managing a business will inevitably lead to better investment returns. Short-term profits are important but they must not come at the expense of the long-term health of a company, nor the society in which it operates. We believe Unilever has the better model for long-term success and we continue to support its management philosophy through our investment in the company. Performance Asset class 1 year years 5 years 10 years Sustainable Leaders m UK All Companies UK Equity rd 1st 1st 2nd Sustainable World m Mixed Investment 40-85% Shares Global Equity 1st 1st 1st - Sustainable Diversified m Mixed Investment 20-65% Shares Multi Asset 1st 1st 1st - Sustainable Managed Growth - 75.m Mixed Investment 0-5% Shares Fixed Income 1st 1st - - Sustainable Managed Income m 12 month income target.8 PPU* to 0/6/2017** Fixed Income 9.99% total return 7.4% total return - - Source: RLAM and FE as at 1 March 2017.¹Fund Performance shown is based on the C Acc share class. *Pence per unit. Please note that the 12 month income target to 0/06/2016 was 4.1 PPU, with the Fund achieving 4.9 PPU over the year. **Not an official performance objective. For illustrative purposes only. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested.

4 CORPORATE GOVERNANCE Coal is on its way out Mike Fox - Head of Sustainable Investments In the year 2016 more of our energy in the UK came from wind farms than from coal (source: Carbon Brief ). Coal electricity generation has declined to just 9.2% of total power generation, a dramatic fall from 22.6% in Meanwhile, wind power provided 11.5% of all energy over the course of 2016 down slightly from 12% in This means CO2 emissions from UK energy would have fallen by around 20% over the last year as coal was replaced by natural gas production, which is much cleaner. This would be enough to cut the UK s overall CO2 emissions by 6% for the year if other sectors emissions remained the same. The reduction in coal generation reflects more onerous environmental regulation, which is making it far less profitable. The changing shape of UK power generation is a very welcome development. VOTING THEMES In the quarter we engaged with 9 companies on a range of topics: Remuneration Animal Testing Corporate Governance Succession Planning AGM Vote Board Skills Diversity Share Capital The UK s remuneration votes In the UK, shareholders are given two opportunities to vote on remuneration: an annual vote to approve pay awarded in the year, and a triennial vote to approve the forward-looking pay policy. The annual vote is advisory only. However, the pay policy vote is binding. If boards fail to receive a majority of support from shareholders then they must propose an alternative policy the following year. Resolutions voted 1,559 Votes against pay 0% Companies we met with 42 Votes in support of management 9% t Votes against directors 6.2% Company meetings voted 110 Pay consultation requests Source: RLAM as at 1 March 2017

5 CompanY Engagement No more spoilt ballots. Corporate Governance in 2017 Ashley Hamilton Claxton - Corporate Governance Manager Ask anyone in governance what their three priorities for this year are and they ll answer, remuneration, remuneration, remuneration. Discussing what you earn could be seen as the ultimate British social taboo, so it s no wonder news about who gets what at the very top makes headlines. Executive pay and the shareholder rebellions against it have become the very public face of corporate governance. BP, Shire, Anglo American and others were left bruised by votes against pay and bonuses for company bosses last year. Increased government pressure on companies to address runaway pay, backed by a harder line from large investors will bring a second shareholder spring of discontent. Against this stormy climate, 2017 brings extra pressure on remuneration committees to get it right. Many companies will be asking shareholders to pass judgement not just on what to pay bosses for this year, but on binding remuneration policies for the next three. After many years of stagnant growth and squeezed real incomes for British workers, big pay-outs are often hard to justify and warrant increased scrutiny this AGM season. Some of our private discussions with companies have seen them take these messages on board, better aligning pay with performance. We applaud Rio Tinto in delaying the bonus for its ex-ceo against the backdrop of a corruption probe, and AB In Bev for sticking clearly to a mantra of pay for performance, where management who missed targets will not receive bonuses. Even at Berkeley Group, notorious for its generous remuneration policies, the CEO has sacrificed his pay and bonus this year. Others have remained blind to the criticism despite pressure from investors and wider stakeholders. Therefore, our own stance on pay this year is clear. We will not be approving proposals seeking to increase maximum pay-outs under the three year policy, unless there are very convincing reasons for an increase. We will not look favourably on companies seeking to chase the median, increasing pay to keep pace with peer groups. Pay rises where executives have truly taken on more responsibility or where the size or complexity of the business has increased will be reviewed on a case-by-case basis As with previous years, we will not be approving complex pay plans. We favour simplified structures that include a short-term and long-term bonus and clear metrics tied to the key performance measures of the business. If we can t understand how a pay policy works and how it aims to incentivise boardroom performance, then we doubt the executives themselves will be truly motivated by it. However, voting against policies can only get us so far. Many companies which faced shareholder rebellions last year, where we had voted against their pay practices for several years, have remained tone-deaf. We have tried diligent private engagement in many cases, writing letters annually to the company to explain the reasons for our objections. Yet we continue to see problematic pay packages approved by remuneration committees. Therefore, we will consider voting against the reappointment of the remuneration committee chairman where we have consistently voted against pay for several years. While we have shown more restraint in the past, abstaining in the case of director votes in the case of BG Group, this year we expect to use our vote against directors much more frequently this year. While our view of pay at Britain s companies might seem overly downbeat, there is much going on behind the scenes which give us hope. The willingness by so many companies to openly consult and negotiate with a wide range of shareholders and stakeholders on pay is encouraging. It s also encouraging to see some directors eloquently explain the aims of an executive remuneration scheme, especially those who don t need to defer to their pay consultant! In addition, our meetings with some remuneration committee chairmen often show genuine concern for finding the right balance of pay to satisfy both executives and shareholders. Most encouragingly, many problematic pay proposals don t ever see the light of day, thanks to private consultation. That said, there will always be some companies that do not abide by these practices and shareholders have a responsibility to address concerns around poor corporate governance. It is in our clients best interest to do so. While lurid stories of poor management and corporate excess make for more exciting stories, ultimately long-term mismanagement can destroy a lot of value and tar plenty of well-functioning companies with the same brush. There is a real danger of a knee-jerk response which could restrict the rights and discretion of shareholders. This is a mistake, particularly if it leads to further legislation with unintended consequences. Increased regulation of these relationships could discourage public forms of financing in favour of further private equity. Asset managers must prove that we are attuned to the public mood. Whether through an institutional pension scheme, a financial adviser or an individual themselves, we have responsibility for the life savings of tens of millions of people. We have the power to push for meaningful change at many of Britain s best businesses. We must not spoil this chance. 5 This article was first published in The Daily Telegraph on Monday 27th March 2017

6 CONTACT For further information about our responsible investment capabilities, please contact: RLAM s Responsible Investment Team Ashley Hamilton Claxton Corporate Governance Manager Gail Counihan Responsible Investment Analyst Sophie Johnson Responsible Investment Analyst Royal London Asset Management 55 Gracechurch Street London ECV 0RL Tel Fax institutional@rlam.co.uk For professional investors only Issued by Royal London Asset Management May Information correct at that date unless otherwise stated. For professional investors and advisors only. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Royal London Asset Management Limited, registered in England and Wales number ; Royal London Unit Trust Managers Limited, registered in England and Wales number RLUM Limited, registered in England and Wales number All of these companies are authorised and regulated by the Financial Conduct Authority. All of these companies are subsidiaries of The Royal London Mutual Insurance Society Limited, registered in England and Wales number Registered Office: 55 Gracechurch Street, London, ECV 0RL. The marketing brand also includes Royal London Asset Management Bond Funds Plc, an umbrella company with segregated liability between sub-funds, authorised and regulated by the Central Bank of Ireland, registered in Ireland number Registered office: 70 Sir John Rogerson s Quay, Dublin 2, Ireland. Ref: FQR RLAM PD 0002