INVESTMENT STEWARDSHIP REPORT: ASIA-PACIFIC

INVESTMENT STEWARDSHIP REPORT: ASIA-PACIFIC Q4 2017 DECEMBER 1, 2017

Contents Engagement and Voting Highlights... 2 Engagement and Voting Statistics... 7 Active Ownership and Responsible Leadership... 8 Market Development and Trends... 10 i

Engagement and Voting Highlights Engagements help evolve climate risk oversight and disclosure As part of our focus on understanding how companies manage climate change risk we 1 engaged an Australian oil and gas company. The company had been the target of a shareholder proposal seeking disclosure of climate change risk in line with the framework released by the Task Force on Climate-related Financial Disclosures (TCFD). The shareholder proposal was submitted during the consultation period for the TCFD framework. Based on constructive engagement and the company s track record of responding to shareholder concerns on environmental and social issues it was decided not to support the shareholder proposal. Following our initial meeting we had several more meetings with management that focused on the company s governance of climate change risk. Our review of the company s corporate governance practices revealed a lack of perceived accountability by the board on the issue of climate change risk. There was discussion with management regarding the establishment of a standalone board climate change risk committee. However, the board opted to continue with the existing committee structures and amend the terms of reference for the existing Health, Safety and Sustainability Committee. These revised terms of reference now articulate the board s responsibility for the oversight of climate change risk. We believe this was a good outcome for the company s shareholders. This company, as well as other oil and gas companies we have engaged with, are working on trying to understand the best way to adopt the TCFD framework. Rather than focusing our discussion on what and how to disclose, we worked on developing a series of questions that we believe good climate change disclosure should answer. Ultimately, as an investor, we want to know how resilient the company is to climate change risk in terms of transition and physical asset risks and how the company manages this risk. The company is planning to release a report to shareholders and other stakeholders in Q1 2018 on climate change risks. We believe our engagements have provided management with a clear understanding of shareholder expectations with respect to aligning disclosure with the TCFD framework. Once released, we will review the report and provide feedback. Engagements with the most carbon-intensive companies in BlackRock s portfolios BIS has continued its engagements with oil, gas, and utility companies to emphasize the 2 need for increased reporting around climate-related risks. We recently sent letters to the CEOs and general counsels of approximately 120 of the most carbon-intensive companies globally in BlackRock s aggregate equity portfolio. To date, the APAC team has sent letters to 22 companies. These are companies that we consider to have material climate risk inherent in their business operations. We have asked them to closely review in full the TCFD recommendations and to consider reporting in alignment with its framework. In addition, we encourage companies to engage with us regarding the changes in reporting that might be necessary for the company to achieve alignment with TCFD recommendations and any anticipated obstacles. Our analysis suggests that many companies exposed to climate risk are already reporting to some degree on their policies, adaptation strategies, and metrics for managing climate risk. We see the TCFD s recommended reporting framework as a means to achieve the comparability and consistency of reporting that is important to us as investors. 2

Structural reform and human capital challenges at a Japanese bank provide additional guidance particularly around remuneration for executive and non-executive directors (NEDs). In light of the Bank of Japan s negative-interest rate policy and Japan s aging population, Japanese banks are struggling with an increasingly challenging business environment of eroding margins and low credit demand. The evolution in Fintech is also expected to significantly disrupt the industry landscape over the long-term. Given these drastic changes in the business environment, we continue to engage with the banking sector on their mid- to long-term strategies. One of the banks with which we engaged announced a long-term strategy which includes structural reforms involving the elimination of more than 5% of its current workforce within the next decade. The bank also emphasized expanding the use of financial technology to strengthen digital banking channels, streamline back-office functions, and reshape the organization accordingly. These initiatives are expected to improve the bank s labor productivity and should make its business more resilient in response to these industry headwinds. BlackRock believes that human capital management - including labor relations and employee training - are success factors that can lead to a competitive advantage. We will continue to engage this bank as well as others in the industry to evaluate their respective progress as they seek to implement sound business practices likely to create engaged and stable workforces in the face of these ongoing challenges Remuneration engagement with a pre-production mining company in Australia Listed mining companies in preproduction phase often have 4 unusual corporate governance features primarily relating to board structure and remuneration. Our Australian guidelines acknowledge the circumstances 5 relating to these early stage companies and The chairman of a pre-production mining company where BlackRock was a substantial shareholder reached out to the BIS team to discuss a proposal regarding the remuneration of their NEDs. The company is nearing production phase and will soon be generating operating revenue. Given the cash flow situation of a pre-production company, the NEDs receive very low fees; however, the board is planning on proposing the issuance of performance rights to the NEDs. A feature of the proposed issuance is that the vesting of the rights is subject to a share price performance hurdle. Our concern with NEDs receiving performance based remuneration is that it can blur the role between executive and NED. BlackRock will support the grant of share rights to NEDs where the rights are issued in lieu of cash fees (as a cash saving measure), there are no performance conditions, and if full vesting occurs within 12 months of the grant date. BlackRock is in principle supportive of this company s proposal to adjust the last few years of the remuneration paid to the NEDs through the grant of share rights. BlackRock is also, in principle, supportive of the company s proposal to issue share rights to the NEDs in lieu of cash until operating revenues are able to sustain NED cash fees. Shareholders will not be voting on the proposed adjustment and structure of NED fees until the 2018 annual general meeting. Our final decision with respect to supporting the change to NED remuneration will depend on the quantum and a cogent explanation in the explanatory memorandum. Engagement with Chinese companies on climate risk disclosure As the largest carbon emitting country, China plays a critical role in the global efforts to rein in climate change. In 2016, China ratified the

Paris Agreement 1 and committed to its Nationally Determined Contribution (NDC) 2 which include the following: 1. Peaking carbon dioxide (CO2) emissions by 200; 2. Lowering the carbon intensity of China s gross domestic product (GDP) by 60%-65% below 2005 levels by 200;. Increasing the share of non-fossil energy of the total primary energy supply to around 20% by 200; and 4. Increasing its forest stock volume by 4.5 billion cubic metres, compared to 2005 levels, by 200 China is implementing various policies to achieve its NDC and to address climate change. Most notably, the country is aggressively replacing coal with natural gas as the primary energy source for power generation and heating. A national carbon trading market is also set to be launched by the end of 2017. BlackRock engaged a number of Chinese companies in the heavy emitting sectors including energy, power generation, construction materials, and petrochemicals. The engagements sought to understand how these companies development strategies align with the government s climate change commitments and what plans they have in response to the launch of the national carbon trading market. Our engagements also provided an opportunity for our team to share our perspective on the Task Force on Climaterelated Financial Disclosures (TCFD) and to encourage disclosure in alignment with its framework. Given the majority of companies in the heavy emitting sectors are fully or majority Stateowned Enterprises (SOEs), it is unsurprising that climate risk management at the companies with whom we engaged is largely driven by government policies. We learned that there appears to be little deliberation around the other risks associated with climate change, including physical risks like the impact of water scarcity and heat stress due to a warmer climate. Consequently, investors have limited insight into the respective business resilience to climate change risks over the long-term. From a policy risk management perspective, we found all companies to be well informed regarding China s commitments and goals under the Paris Agreement. Companies have established dedicated teams to implement their management frameworks and to monitor carbon emission and energy consumption data at the facility level. Companies have also conducted regular training to promote awareness of climate change throughout the firm. Most companies have also built carbon emission performance into senior management s key performance metrics (KPIs), although the weightings of such KPIs tend to vary. Most companies do not believe the national carbon trading market will have a material impact over their production cost in the next two to three years. Companies we spoke with tended to have a positive outlook for this trading market. They appear to be leaders in their respective industries given their implementation of more advanced technologies. Thus, they are likely ahead of their peers in terms of carbon emission management and performance. While all companies we engaged with seemed to be well versed on the subject and were able to discuss specific steps that were taken, they also displayed varying degrees of sophistication and initiative in addressing climate change risks. For example, a cement maker only collected detailed carbon emission data in response to the imminent launch of the carbon trading market whereas a petrochemical company introduced an internalized carbon price for the evaluation process for new projects in order to reflect the true cost and profitability. According to the company the inclusion of the carbon cost will be made mandatory for all new projects from next year. 1 UN Climate Change Paris Agreement, available at http://newsroom.unfccc.int/paris-agreement/; United Nations Framework Convention on Climate Change, available at http://unfccc.int/resource/docs/2015/cop21/eng/10.p df 2 http://www4.unfccc.int/ndcregistry/publisheddocum ents/china%20first/china%27s%20first%20ndc %20Submission.pdf 4

While none of the companies were aware of the TCFD framework, they all welcomed the idea of a common framework and stated that the framework would be considered. However, they also expressed concerns regarding comprehensive disclosure that would include absolute emissions and emission reduction targets (even though most companies have the data on hand). Their concerns included: 1. Absolute carbon emission and reduction targets can be commercially sensitive information given the company s competitors can estimate their production volume and future plans; 2. Providing full disclosure in advance of the national carbon trading market s launch may work against the company given that relevant intensity benchmarks for each sector are still being developed by the relevant authorities;. Carbon emissions are an important issue for the government not just domestically but also in the context of international politics. These companies, being SOEs, do not feel comfortable disclosing what the government has not required them to; and 4. Companies also feel more comfortable disclosing data that has been audited by a third party. However, their emissions data has yet to be verified by a third party. Considering the limited climate risk disclosure within their respective sustainability reports, the in-house knowledge these companies demonstrated during our engagements and the amount of work they have done in response to specific policy measures greatly exceeded our expectation. We plan to have follow-up engagements to get their feedback on the TCFD framework. Engagement aimed at improving board quality in Korea BlackRock met with the President 6 and CEO of a large Korean engineering and construction company which had a falling out with many of its investors following a controversial 2015 merger with an affiliated company. According to the CEO, these events served as a learning experience which led to a significant change in how the board views its role and accountability to shareholders. To improve the board s oversight capability and the company s corporate governance structure, the CEO informed us that he intends to solicit directly from shareholders qualified independent director candidates with international background in corporate governance and relevant industry expertise. To date, the company s independent directors have all been Koreans mostly without direct experience in the industry. We were supportive of the CEO s commitment to improve board quality. We emphasized that the board, not shareholders, should be best positioned to evaluate its current composition to identify director skills and expertise needed to achieve the company s strategic objectives. We discussed the benefits of developing a skills matrix that would facilitate the board s assessment of its current composition in the context of a broader, long-term succession plan. Our engagement highlighted the importance of maintaining a sufficiently wide pool of qualified candidates to draw upon in the future. We suggested that the board may wish to consider working with professional firms that specialize in global executive search as well as board induction training, particularly as the company aims to attract candidates from a global director pool. BlackRock will monitor the board s progress to improve its board quality and intends to continue these constructive engagements with the company. Engaging following a remuneration first strike Executive remuneration has been a 7 focus of Australian investors since the early 2000 s. To address shareholder concerns, a requirement for companies to put a remuneration report to a non-binding shareholder vote was introduced in 2005. 5

More recently, in 2011, the Two Strikes legislation was introduced. This past December BlackRock engaged with a company that had received a first strike. In 2016, BlackRock had supported the remuneration report based on constructive engagement with the chair of the remuneration committee regarding our key concern relating to the total quantum of the CEO s remuneration. At the time, the company released additional information about the nature of the CEO s total remuneration and there was an undertaking to reduce his overall remuneration. When we reviewed the 2017 report we noted that while there had been a significant reduction in annual equity grant to the CEO his overall remuneration was significant and we remained of the view that further annual grants of equity it should be further reduced. Our analysis of his overall remuneration was based on the company s size, complexity, performance and comparison with the company s global peers. We again engaged with the chair of the remuneration committee. It was clear that the remuneration committee is committed to reducing the CEO s total remuneration and we expect to see the current rate of reduction continue. Based on our constructive discussions with the company, the level of reduction of the CEO s total remuneration in 2017, and an expectation that the reduction will continue, we supported the remuneration report. We ve scheduled a Q1 2018 engagement meeting with the chair of the remuneration committee and CEO in order to monitor the company s remuneration commitments. If a remuneration report receives 25% or more against votes in a year, there is a requirement for the agenda of the following year to have a condition proposal to spill the board (only leaving the CEO and the two most recently appointed non-executive directors) which is triggered if there is a second vote of 25% or more against the remuneration report. 6

Engagement and Voting Statistics Japan Engagement Statistics 4 Level of Engagement 5 Topics Discussed* Number of engagements Basic Moderate Extensive Environmental Social Governance 55 19 2 1 7 10 47 Asia-Pacific ex Japan Engagement Statistics 4 Level of Engagement 5 Topics Discussed* Number of engagements Basic Moderate Extensive Environmental Social Governance 70 61 8 1 5 4 76 *Most engagement conversations cover multiple topics. Our engagement statistics reflect the primary engagement topic for which the meeting was called. Asia-Pacific Region Voting Statistics 4 Country Number of meetings voted Number of proposals % of meetings voted against one or more management recommendations % of proposals voted against management recommendation Australia and New Zealand APAC ex Japan, Australia, and New Zealand 271 1,42 22% 2% 1,08 6,080 2% 9% Japan 124 968 % 6% Asia-Pacific Region Total 1,478 8,90 24% 7% 4 The Asia-Pacific engagement statistics are sourced from BlackRock and the voting statistics are sourced from ISS Proxy Exchange on January 4, 2018 and both are a reflection of 4th Quarter 2017. 5 Basic engagement is generally a single conversation on a routine matter; Moderate engagement is technically more complex and generally involves more than one meeting; Extensive engagement is technically complex, high profile and involves numerous meetings over a longer time frame. 7

Active Ownership and Responsible Leadership Speaking Events Members of the Investment Stewardship Asia-Pacific team spoke at or participated in a number of events over the past quarter, with the objectives of furthering the debate on matters deemed important to investors and/or promoting an increased understanding of BlackRock s approach to Investment Stewardship. We target events that enable us to connect with key stakeholders and thought leaders, including corporate directors, senior members of management teams, and other shareholders. Below is a list of select speaking events from the quarter, and subject matter covered: Australian Institute of Company Directors - Webinar BlackRock participated in an integrated reporting webinar organized by the Australian Institute of Company Directors. BlackRock s presentation focused on issues relating to current stakeholder reporting, the positive impacts of integrated reporting, and how integrated reporting will assist investors with decision making. The webinar audience consisted largely of Australian company directors. Hong Kong Institute of Directors Global Directorship Program Hong Kong The Hong Kong Institute of Directors invited our team to make a presentation at one of their recent corporate director courses. Our presentation focused on BlackRock s Investment Stewardship program with a focus on our Hong Kong policies and our expectations of boards of Hong Kong listed companies. The session also covered the proxy voting process as many directors in Hong Kong are unaware of how asset managers use proxy voting services. Hong Kong Investor Relations Association Shareholder Engagement and Activism Hong Kong BlackRock spoke on a shareholder engagement and activism panel and discussed a case study involving a Hong Kong company called G-Resources. The event was focused on shareholder activism and represented the first time BlackRock had been so actively involved in a changed agenda at the company. The case involved the sale of an asset without any justification resulting in a change of business purpose, without any return of capital to shareholders. Australian Investor Relations Association Sydney BlackRock gave a keynote address at the Australian Investor Relations Association s annual conference. We spoke about how a large, mainly index investors engage with investee companies. We reviewed the types of circumstances where BlackRock may proactively seek an engagement meeting. We also discussed BIS 2017-2018 engagement priorities and their accessibility as a resource for investor relations managers to consider when engaging with their institutional investors. Corporate Governance Seminar by Willis Towers Watson Tokyo BlackRock spoke on a panel entitled, Effective Corporate Governance for Investors. The discussion included challenges to effective corporate governance, such as roles and expectations of independent non-executive directors, evaluation of the board, succession planning, and disclosure of advisory positons in Japan. 8

Japan Stock Exchange Management for Corporate Value Creation Seminar Tokyo BlackRock spoke on a panel entitled, Practices and Trends in Stewardship Activities Corporate Value Creation through Engagement. We explained our engagement and voting approach and shared industry insights, including our perspectives on corporate governance in Japan. Pension Fund Association Corporate Pension Fund Forum Tokyo BlackRock presented on practices and trends in stewardship activities to a group of corporate pension funds. We explained our stewardship approach and shared our views on recent corporate governance trends. ISS Corporate Solutions Korea Corporate Governance Briefing Webinar BlackRock spoke on a webinar panel at an event hosted by ISS Corporate Solutions for the investor relations community in Korea. We focused our commentary on BlackRock s approach to engagements and proxy voting, as well as the features of the Korean market that provide unique challenges from the perspective of the BIS team. Global Reporting Initiative (GRI) Hong Kong Annual Meeting Hong Kong Investment Stewardship participated in a panel discussion at the GRI Hong Kong annual meeting on environmental, social and governance (ESG) disclosure and its relevance for investment decision-making. The audience included issuers and institutional investors. China Social Investment Forum Beijing BlackRock participated in a panel discussion on how asset managers use ESG information in their investment activities at the annual conference of the China Social Investment Forum in Beijing. The discussion centered on the status of ESG integration at domestic institutional investors and potential drivers for more meaningful integration. A large number of listed companies and domestic institutional investors attended the conference. 9

Market Development and Trends Australia The Financial Services Council 6 (FSC) has issued an Internal Governance and Asset Stewardship Standard for investment managers and retail asset owners. FSC Standard 2: Internal Governance and Asset Stewardship has been developed to: 1. Encourage higher standards of internal governance and stewardship practices; 2. Provide better information for clients and other stakeholders; and. Raise the quality and standing of Australia s financial services internationally. The new Standard aims to strengthen consumer confidence in Australian financial services and ensure long-term sustainability of the industry. The Standard are non-prescriptive in terms of disclosure, utilizing a comply or explain rationale. Asset managers will be required to describe the policy underlying their practices or explain why they are not relevant to them. China Following in the Shanghai Stock Exchange s footsteps, the Shenzhen Stock Exchange joined the United Nations Sustainable Exchanges Initiative in December, committing itself to promote sustainable and transparent capital markets. Hong Kong In November, the Hong Kong Exchanges and Clearing Limited (HKEX) launched a consultation paper to seek public feedback on its proposed revisions to the Corporate Governance Code (the Code) and related Listing Rules (the Rules). The proposed revisions seek to establish stricter rules around the qualifications of independent directors and the nomination process. For example, a longer cooling-off period is required for former professional advisors and people with material interests in business activities to be qualified as independent director. The issue of over-boarding is also discussed formally for the first time. Companies will be required to comment on the ability of a director candidate to commit when he or she is nominated to 7 or more board seats. It is also proposed to require companies to disclose a nomination policy. The proposed revisions, in our view, only touch on the peripheral issues and would not drive any substantial improvements in the corporate governance standards in Hong Kong. BlackRock plans to submit an official response. In addition, on December 15, 2017, the HKEX announced the conclusions to the New Board Concept Paper published on June 16, 2017. A total of 60 responses were received although there was no breakdown by respondent type. Therefore, it was difficult to gauge whether a particular interest group was over-represented. The HKEX summarized the key feedback as follows: 1. 91% of respondents supported measures that would help attract more issuers from emerging and innovative sectors ; 2. Respondents were largely supportive of allowing pre-profit companies to list in Hong Kong but withheld their support for the HKEX to apply a lighter touch regulatory approach to these companies; 6 The FSC is a membership organization representing Australia s retail and wholesale funds management businesses, superannuation funds, life insurers, financial advisory networks, and licensed trustee companies. 10

. A large majority of the feedback was supportive of permitting weighted voting rights in Hong Kong provided that certain safeguards were provided to ensure shareholder protections; 4. Feedback generally supported allowing companies seeking secondary listings in Hong Kong to be exempted from complying with the requirements in Hong Kong provided that these companies already have good standing on a primary listing on the New York Stock Exchange or Nasdaq; 5. A majority of respondents preferred to have the innovative companies on the Main Board to a New Board in the interest of keeping the listing structure simple. Japan Based on the feedback, the HKEX has determined to proceed to expand Hong Kong s listing regime to facilitate listings of companies from innovative sectors. The HKEX plans to begin the formal consultation on the proposed rule amendments in the first quarter of 2018. On October 26, 2017, the Ministry of Economic trade and Industry published a report, Ito Review 2.0 Final report of the Study Group on Long-term Investment, which includes the summary of the discussion, and the recommendations, of the study group. One of the key recommendations includes Guidance for Integrated Corporate Disclosure and Company- Investor Dialogues for Collaborative Value Creation 7, which aims to foster mutual understanding between companies and investors through information disclosure and dialogue. BlackRock participated in the group and development of the guidance. On December 18, 2017, METI established a Forum for Integrated Corporate Disclosure and ESG Dialogue, to promote the guidance. The Forum will analyze and present good practices of integrated reporting and disclosure of Japanese companies on information material to the creation of the company s long-term value, including ESG issues. BlackRock will continue to participate in the Forum. Korea Park Neunghoo, the Minister of Health and Welfare, announced to the media on December 1, 2017 that the National Pension Service (NPS) will adopt the Stewardship Code in the latter half of 2018. Although drafted in December 2016, the code has failed to generate much interest in Korea thus far, with just 1 signatories to date. With NPS formally announcing its intent to become a signatory in 2018, it is highly anticipated that the Stewardship Code will finally gain traction among local asset managers. 7 http://www.meti.go.jp/english/press/2017/pdf/0529_004b.pdf 11

This document is provided for information purposes only and must not be relied upon as a forecast, research, or investment advice. BlackRock is not making any recommendation or soliciting any action based upon the information contained herein and nothing in this document should be construed as constituting an offer to sell, or a solicitation of any offer to buy, securities in any jurisdiction to any person. This information provided herein does not constitute financial, tax, legal or accounting advice, you should consult your own advisers on such matters. The information and opinions contained in this document are as of January 2018 unless it is stated otherwise and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Although such information is believed to be reliable for the purposes used herein, BlackRock does not assume any responsibility for the accuracy or completeness of such information. Reliance upon information in this material is at the sole discretion of the reader. Certain information contained herein represents or is based upon forward-looking statements or information. BlackRock and its affiliates believe that such statements and information are based upon reasonable estimates and assumptions. However, forward-looking statements are inherently uncertain, and factors may cause events or results to differ from those projected. Therefore, undue reliance should not be placed on such forward-looking statements and information. Prepared by BlackRock, Inc. 2018 BlackRock, Inc. All rights reserved. 12