Engagement and Impact 2016: International Growth ADR ESG

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1 CLEARBRIDGE ESG INVESTMENT Engagement and Impact 2016: International Growth ADR ESG Environmental, Social and Governance (ESG) Investing at ClearBridge ClearBridge s dedicated Environmental, Social and Governance (ESG) Program combines the resources and performance of a mainstream firm with a legacy of specialized ESG expertise. ClearBridge brings the scale, access and infrastructure of a long-term investor with $112.4 billion* in assets under management together with an ESG program that dates back to Combining active investment with active ownership Selecting investments and managing portfolios Advocacy via proxy voting and engagement with company management Client and public education about ESG best practices Risks: All investments involve risk, including loss of principal and there is no guarantee that investment objectives will be met. Investments may also be made in ADRs and other securities of non-u.s. companies in developed and emerging markets which involve risks in addition to those ordinarily associated with investing in domestic securities, including the potentially negative effects of currency fluctuation, political and economic developments, foreign taxation and differences in auditing and other financial standards. These risks are magnified in emerging markets. Investments may be made in small- and mid-cap companies, which involve a higher degree of risk and volatility than investments in large-cap companies. ADRs are U.S. traded securities that represent shares of a foreign-based corporation held by a custodian and they entitle the shareholder to all dividends, net of any applicable local withholding taxes, and capital gains that would be paid on the company s ordinary shares. True ESG integration Firm-wide fundamental research incorporating ESG perspectives across industry sectors Research analyst compensation based in part on evaluating ESG factors linked to company performance An ESG ratings system facilitating systematic research and engagement with companies Company Engagement ClearBridge is an active investment manager that meets with companies on a daily basis. As a firm, ClearBridge hosts around 1,000 company meetings every year and many of those discussions include material environmental, social and governance issues. Company Engagements by Sector International Growth ADR ESG Separately Managed Accounts (SMAs) are investment services provided by Legg Mason Private Portfolio Group, LLC (LMPPG), a federally registered investment advisor. Client portfolios are managed based on investment instructions or advice provided by one or more of the following Legg Masonaffiliated subadvisors: ClearBridge Investments, LLC and Western Asset Management Company. Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional. Telecom 2% Energy 3% Materials 3% Discretionary 9% Staples 13% Financials 21% Health Care 15% Industrials 19% Information Technology 16% 2017 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC and ClearBridge Investments are subsidiaries of Legg Mason, Inc. 10/17 As of Dec. 31, Source: ClearBridge. Based on weighting in portfolio. * As of Dec. 31, 2016.

2 CLEARBRIDGE INTERNATIONAL GROWTH ADR ESG Engagement Themes by Sector At ClearBridge we proactively and regularly engage companies on Environmental, Social and Governance (ESG) issues. These engagements occur in various ways, including one-on-one meetings with senior management as part of our integrated research process and through our active participation in various ESG organizations. The topics we discuss with companies vary depending on what issues are relevant to the individual company and are based on our analysts knowledge and understanding of the particular industry. The breakdown of ESG themes by sector is shown here. ESG Engagement Themes by Sector International Growth ADR ESG 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Discretionary Staples Energy Financials Health Care Industrials Information Technology Materials Utilities Governance Social Environmental As of Dec. 31, Source: ClearBridge. The above themes and key issues are based on discussions with companies across all ClearBridge strategies. Engagement Highlights from 2016 Inditex Inditex is a leading fashion retailer, best known for its Zara brand, with more than 7,000 stores worldwide. The company differentiates itself with a business model that revolves around a central inventory position with short lead times that allows it to react in a timely manner to fashion trends and feedback. ClearBridge met with the company twice in the last year, with ESG issues a key discussion point in both engagements. ClearBridge hosted a meeting with Inditex CEO Pablo Isla and investor relations in March 2016 that focused on employee compensation and incentives. In 2015, the company implemented a two-year profit sharing plan for all employees who had been at the company for more than two years. The plan shares 10% of the profit increase with employees, giving them an incentive linked to company performance. The payout amounts to roughly 600 per employee, a meaningful sum for a large portion of its workforce. Isla told us he likes providing every employee a stake in the success of the company and noted the union employees he has met with are also supportive of increasing profitability. ClearBridge led a follow-up discussion with Inditex s director of capital markets in September 2016 that centered on how the company monitors the treatment of workers in its supply chain. Turkey is a major supplier for the company s apparel products and has come under recent scrutiny over employment and treatment of Syrian refugees in the garment industry. Inditex sees this as an extremely important issue and is working with IndustriALL and other non-government organizations to ensure that refugees are not exploited and to crack down on the use of child labor. Despite all the work they are doing, Inditex acknowledges they are not immune to reputational risk should violations be uncovered. Yet they characterize the Turkish supply chain as very professional and committed to maintaining high workplace standards. Inditex has 100 people on the ground in Turkey and systems in place to approve and monitor sub-contractors. The company s policy is to remedy workplace issues rather than exit a supplier relationship, however they do follow a stringent three strikes and you re out system with respect to workplace violations. While the refugee issue in Turkey is complex and nuanced, we are encouraged by the company s proactive approach and adherence to high standards for outsourced labor. This commitment is borne out by its conscious decision not to play up its advocacy efforts on behalf of exploited workers. 2

3 CLEARBRIDGE ESG INVESTMENT 2016 ENGAGEMENT & IMPACT REVIEW ASOS ASOS, short for As seen on screen is one of the leading global fashion internet platform companies for apparel aimed at 20 to 30- year olds. The company s social media integration has always been the hallmark of their appeal to their target market. ClearBridge met ASOS CEO Nick Beighton and CFO Helen Ashton in October 2016 following the release of its fiscal year results. As with Inditex, the Syrian refugee issue in Turkey is a front and center issue for ASOS. Turkey has been a sourcing base for a long time, but a lack of infrastructure to process applications for refugees as well as high local unemployment has led just 4,000 refugees to obtain the legal right to work there. Estimates by the Business and Human Rights Resource Centre have 250,000 to 400,000 refugees working without legal documentation in Turkey. ASOS discovered undocumented Syrian adults working in suppliers factories, but rather than firing these workers, the company recognized the need for them to work and wanted to provide them with a safe working environment and proper wages. The company also found that a subcontractor breached its terms of trade by employing three Syrian adolescents. ASOS chose to place the adolescents back into Turkish school and are paying the family the equivalent of national living wage. The company told us it will collaborate with the other big players that use Turkish suppliers to curb abuses, relying on the power of the purchase order to pressure suppliers to change their behavior. Schlumberger Schlumberger is an energy services company that provides a wide range of services, including technology, project management, and information solutions to the oil and gas industry. ClearBridge has an ongoing dialogue with Schlumberger on their business dynamics and on environmental, social and governance issues. We host and attend a number of meetings each year with senior management of the company. In 2016, in addition to our regular meetings, we hosted the company s Vice President, Government and Industry Relations, who heads the company s sustainability effort and engagement, to provide feedback on their current practices. We discussed Schlumberger s sustainability focus and the tools that the company has developed to help its customers quantify their sustainability impact. The company looks to understand, benchmark and address concerns of its various stakeholders related to the oil & gas industry (e.g. workplace safety), the environment (e.g., clean air/water, renewable energy) and local communities (e.g., employment, quality of life and not-in-my-backyard concerns). The company has established key performance indicators including water usage, greenhouse gas emissions, chemical exposure, land disturbance, traffic and noise impacts etc. that enable it to keep track of its progress. We also hosted the CEO in a separate meeting where he discussed the integration of these environmental and community impact assessment tools into their business model. Management also shared their social responsibility efforts related to employee engagement and diversity, STEM-oriented community outreach initiatives and human rights. Schlumberger s technological innovations have positively influenced the industry in terms of sustainable practices in energy services and with its technology leadership position in oilfield services, its ongoing progress in this area can have a continual industry-wide impact. ESG Rating Distribution International Growth ADR ESG A 35% AA 41% AAA 23% AAA, Best in Class: Company has integrated ESG strategy into its business model, usually with full CEO and/or employee support; formally measures sustainability efforts and proactively communicates to investors. Often, these are companies that are providing goods and services that have a positive effect or impact on society or the relevant industry. AA, Intermediate: Company sees value in ESG factors, has begun to incorporate sustainability into business operations and products and has started reporting its progress. A, Beginner: Company recognizes potential to capitalize on ESG improvements B, Uninvestable: Company with poor ESG record or involved in unsustainable industries such as tobacco or coal. As of Dec. 31, Source: ClearBridge. 3

4 CLEARBRIDGE INTERNATIONAL GROWTH ADR ESG Engagement Themes: Data Privacy and Data Security Issues of data security and data privacy have become areas of increasing focus for ClearBridge research and engagement in recent years. This is with good reason as the frequency of high-profile data breaches has increased, with breaches at companies like Yahoo!, ebay, Target, Home Depot and health insurer Anthem in the past several years. In addition, there has been a significant rise in data privacy controversies at companies, such as the unauthorized selling of customer information or manipulation of user data for research. Data security and privacy are not only important human rights issues, but also business issues as a breach of customer trust can lower usage of a company s internet platform or online products, resulting in reduced revenues. In 2016 ClearBridge discussed these issues with numerous companies including the example below. Given the speed at which technological capabilities are improving, data privacy and security will continue to be key areas of focus for ClearBridge going forward. SAP SAP is a provider of application software and cloudbased software solutions to manage corporate enterprises. SAP has made sustainability a corporate priority, is an industry leader in most environmental and social areas and one of the few companies with an investor relations contact dedicated to ESG investors. It seeks to offer products that will help the world run better and improve people s lives, such as partnering with Germany s National Tumor Center in utilizing SAP software to analyze cancer DNA. SAP is transparent in its ESG disclosures and goals, such as 25% of women in management positions by the end of Our information technology analyst has had an ongoing discussion with SAP on ESG issues, including data privacy and security. The company has made security a central part of its culture and takes a multifaceted approach to protect personal information that involves secure software development, prevention-focused product architecture, network detection, mobile device security and employee training and awareness campaigns, known as its Human Firewall. SAP software is also designed to help its customers ensure security. We are encouraged that the company publicly discloses its security and privacy practices on its website. SAP is a recognized industry leader for its best in class social and environmental practices and thought leadership in promoting these practices. We would also like to see the company improve on the governance front by broadening the diversity of its board of directors. This is a topic we discussed with SAP in 2016 and it is an area that the company has acknowledged as an area for improvement. Thought Leader Engagement and Public Education Another aspect of ClearBridge s approach to ESG investing is to participate in industry-wide discussions and projects to improve industry practices and collaborate with other investors and organizations on addressing environmental, social and governance challenges. Examples of thought leader engagement and public education activities in 2016 ClearBridge white papers (available at clearbridge.com): Disruption from Electric Vehicles Presents New Growth Opportunities The Future of Investing ESG Portfolios: Changing Beliefs, Perceptions, and Goals ESG Ratings: Integrating Fundamental Analysis with Environmental, Social and Governance Considerations Principles for Responsible Investment (PRI): PRI, the preeminent global organization promoting responsible investment and to which ClearBridge is a signatory, released an extensive new report in 2016 titled A Practical Guide to ESG Integration for Equity Investing. The guide is the most comprehensive global report to date on equity integration, with investment case studies presented by practitioners. Neal Austria ClearBridge s consumer discretionary analyst contributed a case study to the report on how strong workplace practices implemented by a U.S. retailer contribute to its earnings growth, as compared to its peers. The intent of the report was to demonstrate the value of ESG integration techniques, most notably the integration of ESG factors into fundamental, bottom-up analysis and share owner engagement. Sustainability Accounting Standards Board (SASB): SASB is an independent non-profit whose mission is to develop and disseminate accounting standards that help companies disclose material, decision-useful ESG information to investors. That mission is accomplished through a rigorous process that includes evidencebased research and broad, balanced stakeholder participation. ClearBridge s two financials sector analysts Steve Rigo and David Hochstim participated in this process through a one-on-one feedback session with SASB to provide detailed input on the reporting framework and metrics SASB is developing for Financials Sector Industry Briefs. 4

5 CLEARBRIDGE ESG INVESTMENT 2016 ENGAGEMENT & IMPACT REVIEW Key Issues Covered in 2016 Company Engagements Environmental Social Governance Biodiversity Carbon emissions Community impacts Data collection and reporting Efficient water infrastructure Energy efficiency Access & affordability of lifesaving medicines Affordable housing initiatives Customer service & education Cyber security & data privacy Drug pricing Employee engagement & retention Accounting practices Allocation of capital Audit practices Board governance over sustainability issues Chairman & CEO separation Environmental regulation Employee health, wellness and safety Executive leadership Landfill environmental control Ethical procurement practices appointments (leaking etc.) Factory worker wages Family ownership & interests Methane emissions and Improving drug safety & efficacy Fraud detection capture Industry collaboration to solve complex social Government investigations Nuclear generation exposure health care issues Long-term strategy vs. Renewable power sourcing Food ingredients transparency activist agendas Supply chain emissions Layoffs fair treatment of employees and Management succession/ Sustainable packaging transitional support appointment of a new CEO Toxic by products Sales practices for financial services New board member nominations Zero waste facilities companies Proxy access Supply chain traceability Access to Medicine Index: The Access to Medicine Index analyzes the top 20 research-based pharmaceutical companies on how they make medicines, vaccines and diagnostics more accessible in low- and middle-income countries. There are two billion people in the world with no access to medicine and the Access to Medicine Index gives insight into what the pharmaceutical industry is doing to improve this situation. In 2016 ClearBridge signed the Access to Medicine investor statement in support of the Index. The statement acknowledges the issue of access to medicine as material to long-term shareholder value creation and the important role that pharmaceutical companies play in addressing this issue. In addition to signing the statement, Marshall Gordon ClearBridge senior analyst for health care attended an Access to Medicine launch event in New York to discuss the findings of the organization s most recent research. United Nations Environment Program Finance Initiative (UNEP FI): UNEP FI is a partnership between United Nations Environment Programme and the global financial sector created after the 1992 Earth Summit with a mission to promote sustainable finance. ClearBridge has been an active member of UNEP FI since 1997 and has contributed to numerous groundbreaking responsible investing reports over the past decade (available at In 2016 ClearBridge hosted an annual meeting for UNEP FI s North American signatories at its offices in New York. The meeting was an opportunity for ClearBridge and other signatories (insurers, banks and asset managers) to review ongoing work and strategize about future priorities and work streams. New York Stock Exchange: Mary Jane McQuillen, Managing Director and Head of ESG Investment at ClearBridge, was invited to speak on a panel discussion at the New York Stock Exchange Investor Relations Summit to a group of over 200 companies. The panel discussed the importance of environmental, social and governance (ESG) issues to investors and answered questions from attendees, all of whom were in investor relations roles at companies. Investor relations professionals are the primary contacts for ClearBridge and all other investors when interacting with companies, so it is important for investor relations teams to understand the interest in ESG issues from investors and how to engage investors on these topics. Responsible Investor (RI) Americas Conference: RI Americas is one of the largest conferences for ESG investors in the U.S. It is held annually at Bloomberg s headquarters in New York City and was attended by over 300 delegates in It is a forum for asset owners and asset managers to hear about best practices from those working in ESG investing. At the conference Mike Kagan ClearBridge Managing Director and Portfolio Manager participated in a panel discussion on how institutional investors can engage companies on sustainability issues. Having described our 5

6 CLEARBRIDGE INTERNATIONAL GROWTH ADR ESG integrated approach to investing, Mike emphasized that the key to good research, analysis and eventual impact is company engagement. ClearBridge has over 1,000 engagements with public corporations each year and many of those conversations involve material ESG issues such as improving corporate governance (e.g., promoting proxy access or changing compensation structures to be more long-term oriented) and better sustainability reporting. ClearBridge is an active member of the below organizations: 6 ClearBridge Investments 620 Eighth Avenue, New York, NY ClearBridge.com