Responsible Investor conference

Contents 1 Who are we? 2 Our current thinking on sustainable investment 3 Sustainability and our manager research process 4 ESG in RFPs: push and pull 2

1. Who are we? Introduction to Towers Watson. 3

Who is Towers Watson? We are a leading global professional services company that helps organizations improve performance through effective people, risk and financial management We offer solutions in the areas of employee benefit programs, talent and reward programs, and risk and capital management With over 700 associates we provide investment consulting to some of the world s largest funds 4

Typical services We provide tailored, value-added investment advice Manager monitoring and evaluation Compliance and style monitoring Performance reporting Performance monitoring Mission and governance Risk budget Internal governance and setting beliefs Investment objectives Investment policy Risk budgeting Manager selection Client Strategic asset allocation Custodian selection Manager searches Cost structure analysis Manager fee negotiations Transition management Manager structure Benchmark design Asset/Cashflow modeling Custom benchmarks Manager structure Asset allocation 5

Towers Watson s Manager Research Team 1 April 2012 European Research Team 67 researchers Americas Research Team 45 researchers Global Research Team 149 researchers (96 full-time equivalents) - Asia Pacific Research Team 37 researchers Over 3000 formal research meetings per year across all the major asset classes and in a wider range of regions. Meetings with over 2500 asset managers per year.

2. Our current thinking on sustainable investment. 7

Current thinking on long term and sustainable investment Thesis The world is entering a period of significant transformation in economies, politics, capital markets and across society Sustainability factors such as climate science and resource scarcity are part of this transformation Current investment process and strategies are not likely to be fit for purpose given these levels of change, and so we need a Plan B Key characteristics Multiple time horizons Long term objectives are not compromised by short term commitments Need to be adaptive and reflective, recognising uncertainty as well as risk Responsible ownership practices Consideration of sustainability factors in research and asset allocation process 8

3. Sustainability and our manager research process A work-in-progress. 9

Sustainability in manager research Embedding ESG in our routine manager research Capacity building: Building ESG knowledge within different asset classes via internal and external training External data sources: Access to MSCI ESG research; manager inputs via evestment Alliance ESG risk modelling: ESG research enables portfolio-level modelling and monitoring Active Ownership Deeper active ownership research on those managers with significant client exposure Sustainable Products Sustainable thematic equities Renewable energy infrastructure Sustainable real estate ESG best-in-class equities Environmental markets private equity Manager assessment: ESG questions incorporated into routine manager discussions. ESG research enables stock-level discussions with managers Integrated approach: No separate ESG rating; this is integral to our FREX ratings. 10

Typical process for rating products Universe of managers Desk-based research Market knowledge, contacts, publications, databases Experience/stability of team, fees, process/philosophy, quant analysis Initial research meetings Follow-up desk-based research & conf calls Follow-up meetings Meet key people, detail on process, independent thoughts emails Review manager s research & quant output, further quant analysis Sit in on internal meetings & investment discussions, meet more people Engagement Fees, capacity framework, vehicles Devil s advocate One ASK member makes case against rating manager highly Skill 1 considerations ASK signs off Key points to cover before moving to a FREX 1 skill rating ASK debates all key issues & decides whether to assign a FREX 1 skill rating Head of stream signs off 11

Where does sustainability thinking come in? Universe of managers Desk-based research Market knowledge, contacts, publications, databases Experience/stability of team, fees, process/philosophy, quant analysis Initial research meetings Follow-up desk-based research & conf calls Follow-up meetings Meet key people, detail on process, independent thoughts emails Review manager s research & quant output, further quant analysis Sit in on internal meetings & investment discussions, meet more people Engagement Fees, capacity framework, vehicles Devil s advocate One ASK member makes case against rating manager highly Skill 1 considerations ASK signs off Key points to cover before moving to a FREX 1 skill rating ASK debates all key issues & decides whether to assign a FREX 1 skill rating Head of stream signs off 12

What tools do we use to support the manager research In-house expertise External expertise Investment beliefs - Global Investment Committee has outlined our investment beliefs relating to sustainable and long term investment Forward looking research - Thinking Ahead Group has done research on sustainability, extreme risks and complexity Thematic research Portfolio level ESG risk modelling (work in progress) Smart beta research - is there an ESG premium? (work in progress) Best practice guides Third party ESG research External speakers This approach can also be adopted by asset owners and asset managers 13

Sustainable investment: future direction. 14

Sustainability is not just about ESG factors. time horizon and alignment are also key For example: Performance guidelines Fee basis Guidelines/monitoring Compare with target of CPI +6% pa over rolling periods of five years, on total return and income return Consider also: Target risk relative to benchmarks Target performance relative to World Index 80% (say) of the fee is on a fixed basis supporting the core elements of the mandate (securing the manager s capacity) 20% (say) of fee is budgeted to come from performance versus targets over rolling five years (supporting profit and comp) Guidelines specify incorporation of sustainability considerations in process (ESG, other longer term risks) Meeting/monitoring focus: Valuation metrics Turnover Longer-term risks and performance Skill and process review.

4. ESG in RFPs. 16

ESG in the selection process ESG factors are playing an increasing role RFPs Statement of Investment Principles Consultant manager research processes A new push and pull dynamic is emerging be ready for it Asset owners will be pulling information in this area, so asset managers need to do more pushing out information in this area 17

Limitations of reliance The document has been prepared by Towers Watson Limited for marketing purposes only. No action should be taken based on this document as it does not include analysis of a specific investor s needs. In preparing this document we have relied upon data supplied to us by third parties. While reasonable care has been taken to gauge the reliability of this data, this document carries no guarantee of accuracy or completeness and Towers Watson cannot be held accountable for the misrepresentation of data by third parties involved. This document is provided to the recipients solely for their use, for the specific purpose indicated. This document is based on information available to Towers Watson at the date of the document and takes no account of subsequent developments after that date. It may not be modified or provided to any other party without Towers Watson s prior written permission. It may also not be disclosed to any other party without Towers Watson s prior written permission except as may be required by law. In the absence of our express written agreement to the contrary, Towers Watson accepts no responsibility for any consequences arising from any third party relying on this document or the opinions we have expressed. This document is not intended by Towers Watson to form a basis of any decision by a third party to do or omit to do anything. Towers Watson is authorised and regulated by the Financial Services Authority. 18