J.P. Morgan Asset Management (JPMAM) understands that putting our clients’ interests’ first means recognizing and managing investment risks and opportunities associated with Environmental, Social, and Governance factors. With decades of investment experience and over 1200 professionals, we have a deep understanding of investment portfolios across multiple dimensions and a goal of producing the best risk-adjusted returns that align with our clients’ objectives. Through our engagement and partnership with various organizations, we continually increase our knowledge and views on key ESG issues and best practices. We have been a signatory to the United Nations supported Principles for Responsible Investment initiative since 2007 and are committed to incorporating ESG factors into our investment practices, where material and relevant.

To help drive our commitment, we have established a Sustainable Investment Leadership Team (SILT) which has begun implementing a coordinated strategy for sustainable investing across JPMAM. This cross-functional team is comprised of senior leaders spanning across all regions with a deep and diverse set of expertise across asset classes and client channels.

SILT’s mandate includes:

  • Promoting internal best practices, including identification and assessment of ESG issues across asset classes and investment offerings.
  • Driving thought leadership and innovation through information, education and partnerships to encourage broader awareness and adoption.
  • Deepening and broadening current investment capabilities including portfolio analytics, measurement and reporting.
  • Sharing our views on sustainable investing and helping clients better understand our capabilities across asset classes and investment strategies.

SILT sub-working groups focus on advancing specific agenda items:

Investment Capabilities group engages with investment teams to support systematic ESG integration into standard research and portfolio construction processes. Additionally, the group discusses development of innovative investment solutions.

Research, Sponsorships, and Membership group manages relationships with various sustainable investing networks and forums, engages with industry experts and data providers, and provides training materials for internal investment professionals on ESG trends, competitive landscape and initiatives.

Marketing & Communications group promotes consistent, compelling, and timely internal and external communication and engagement.

We strive to increase transparency around our commitment to sustainable investing. To learn more about our efforts please visit jpmorgan.com/esg.

Environmental, Social and Governance (ESG) factors are non-financial considerations that are important for stakeholders to keep in mind when assessing a company’s performance.

ENVIRONMENTAL: SOCIAL: GOVERNANCE:
Issues relating to the quality
and functioning of the natural
environment and natural
systems, e.g., carbon emissions,
environmental regulations, water
stress and waste
Issues relating to the rights,
well-being and interests of people
and communities, e.g., labor
management, health & safety and
product safety
Issues relating to the management
and oversight of companies and

other investee entities, e.g., board, ownership and pay
Source: Definitions, PRI; Examples, MSCI.

A longstanding approach to corporate engagement

We regard regular, systematic and direct contact with senior company management, both executive and non-executive, and boards, when appropriate, as crucially important. As a fiduciary, we proactively engage to create value for our clients. We believe effective engagement requires a deep understanding of industries, market trends, individual companies, and operating environments.

To accomplish this important undertaking, we rely on both the expertise of our research analysts and our corporate governance specialists. Our global research analysts are industry specialists, many of whom have spent their entire careers following one sector. They engage with companies on a regular basis to better understand the companies in which our clients invest. The role of the corporate governance specialist includes driving engagement with an emphasis on corporate governance and where material and relevant environmental and social factors. They have a deep understanding of the operating environment in their regions, ranging from regulatory environment to best practices in engagement.

In addition to attending company meetings with analysts and portfolio managers where relevant, corporate governance specialists hold dedicated meetings as needed to discuss areas of specific concerns, including those related to ESG. This integrated approach to engagement has been in place for years. In 2016, we held over 700 dedicated ESG engagement meetings globally. Additional details of our engagement activity are available to our clients on request.

Our corporate governance specialists and research analysts are regionally aligned yet all report up through the CIO of Global Equity. This structure ensures the alignment of interests and consistency to our engagement approach. Many of these individuals comprise our Proxy Voting Committees also chaired by the CIO of Global Equity.

SUSTAINABLE INVESTING: OUR ENVIRONMENTAL, SOCIAL & GOVERNANCE (ESG) STRATEGY IS UNDERPINNED BY A RESEARCH-DRIVEN APPROACH

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ESG engagement insights & trends

Large shareholders globally continue to push corporate boards to adopt best governance practices. There is increased emphasis on board refreshment and diversity, director skill profiles and over-boarding. We see increasing demands from institutional investors on aligning management incentives with long term and sustained value creation. There is an increased focus on issues related to climate change in light of the evolving policy environment. We expect these trends to continue.


STEWARDSHIP CODES

First promoted in the UK in 2010, Stewardship Codes aim to enhance the quality of engagement between investors and companies.

Signatories are encouraged to engage with the companies they own to understand issues and promote best practices. There are now similar Stewardship Codes in Japan, Hong Kong, Brazil and elsewhere.

In 2016, the UK Financial Reporting Council assessed signatories to the UK Stewardship Code based on the quality of their Code statements.

A tiering exercise was undertaken to distinguish between signatories who report well and demonstrate their commitment to stewardship —

J.P. Morgan Asset Management was proud to be awarded a Tier One.


Samples of our recent engagement activities include:

Climate - We have attended specialist briefings on climate change in an effort to understand how some of our portfolio companies are managing and adapting to various climate risks and opportunities, including those presented by evolving government policies, technology trends, and market forces. This can have a material impact for high-carbon intensity sectors, such as steel and cement production, which both contribute up to 20% of global emissions.

Cyber Security - We recently undertook a series of engagement meetings with portfolio companies to encourage better disclosure in relation to cyber risk, and to understand recent issues, including near-misses around data privacy breaches. Using our third party ESG data provider to analyze portfolio companies with relatively weak processes and procedures, or where disclosure of these issues noticeably lagged peers, we have developed a toolkit of engagement questions for companies related to cyber security.

Shareholder Rights - JPMAM held a successful engagement with an Asian tech company to avoid a value-destroying disposal of a portion of their assets. We wrote to the board to identify concerns over the proposed sale, which in our view constituted a material related-party transaction, as the company founders stood to benefit personally at the expense of minority shareholders. As a result of our engagement, the company agreed to set an independent Special Committee to oversee the deal, which was ultimately withdrawn.

Principles for corporate governance & voting activity

J.P. Morgan is committed to delivering superior investment performance to its clients worldwide. We believe that one of the drivers of that performance is an assessment of the corporate governance principles and practices of the companies in which we invest our clients’ assets, and we expect those companies to demonstrate the highest standards of governance in the management of their businesses at all times.

We have set out below the main principles, which provide the framework for our corporate governance and proxy voting activity in our equity investment processes, which we believe have global applicability. Detailed corporate governance policies and proxy voting guidelines also exist for each of the main J.P. Morgan Asset Management entities around the world, each consistent with applicable law and best practice in these different jurisdictions. Copies of these are available on request, or to download from our regional websites.

These general principles are based on the OECD Principles of Corporate Governance, which we consider to be a common basis for the development of good governance practices worldwide. Regardless of their location and jurisdiction, companies should address the following:

RESPONSIBILITIES OF THE BOARD Companies should be controlled by an effective board, with an appropriate balance of executive and non-executive directors, such that no single stakeholder or group of stakeholders has a level of influence that is disproportionate to their equity capital commitment to the company. The board should have oversight for certain key functions, including reviewing and guiding corporate strategy, major plans of action and risk policy. The board should also be responsible for selecting, compensating and, when necessary, replacing key executives and overseeing succession planning, as well as aligning executive and board remuneration with the longer-term interests of the company and its shareholders.
EQUITABLE TREATMENT All shareholders of the same class should be treated equally, and all shares within the same class should carry the same rights. Impediments to cross-border voting should be eliminated, and companies should not make it unduly difficult or expensive to cast votes. Minority shareholders should be protected from abusive actions by controlling shareholders.
RIGHTS OF SHAREHOLDERS Shareholders should have the opportunity to participate and vote in general meetings and should be furnished with sufficient and timely information to make informed decisions. Capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be disclosed, and anti-take-over devices should not be used to shield management and the board from accountability.
ROLE OF STAKEHOLDERS Stakeholders, including individual employees and their representative bodies, should be able to communicate their concerns about illegal or unethical practices freely to the board, and their rights should not be compromised for doing this. Where stakeholders participate in the corporate governance process, they should have access to relevant, sufficient and reliable information on a timely and regular basis for that participation to be effective.

Our fiduciary duty to vote proxies

We manage the voting rights of the shares entrusted to us as we would manage any other asset. We vote shares held in the best interest of our clients, based on our reasonable judgement of what will best serve the financial interests our clients. Annually, we cast approximately 10,000 proxy votes across 72 countries worldwide.

Responsibility for the formulation of voting policy in each region rests with the regional proxy committees (or their local equivalent), whose role is to review corporate governance policy and practice with respect to investee companies in each region and to provide a focal point for corporate governance issues. Each committee is typically composed of senior analysts, portfolio managers, corporate governance specialists and members of legal and compliance. Each regional proxy committee reports in turn to a global proxy committee chaired by the Global Head of Equity, which has overall responsibility for our approach to governance issues worldwide.

We regularly review and evolve our engagement and proxy voting practices. Effective April 1, 2017, JPMAM’s U.S. proxy voting committee has approved revisions to the North American proxy voting guidelines concerning the factors that will be considered in evaluating proposals regarding disclosure and risks related to climate change proposals.

To further strengthen our commitment to ESG factors, we have recently added an ESG Portfolio Manager to the North American Proxy Voting Committee, and an individual with specific extractive sector expertise to the US Equities’ corporate governance specialists.

To learn more

Read our Global Proxy Voting Guidelines available at www.jpmorgan.com/esg

NORTH AMERICAN US PROXY VOTING GUIDELINES RELATING TO CLIMATE CHANGE PROPOSALS
EFFECTIVE APRIL 1, 2017

We believe that a company’s environmental policies may have a long-term impact on the company’s financial performance. We believe that good corporate governance policies should consider the impact of company operations on the environment and the cost of compliance with laws and regulations relating to environmental matters, physical damage to the environment (including the costs of clean-ups and repairs), consumer preferences and capital investments related to climate change. Furthermore, we believe that corporate shareholders have a legitimate need for information to enable them to evaluate the potential risks and opportunities that climate change and other environmental matters pose to the company’s operations, sales and capital investments. We acknowledge that many companies disclose their practices relating to social and environmental issues and that disclosure is improving over time. We generally encourage a level of reporting that is not unduly costly or burdensome, and does not place the company at a competitive disadvantage, but provides meaningful information to enable shareholders to evaluate the impact of the company’s environmental policies and practices on its financial performance. We consider how environmental and social issues affect the risks to which companies are exposed and how they impact the performance of those companies. In addition, we consider various factors, including: the company’s current level of disclosure and the consistency of disclosure across its industry; existing and proposed mandated regulatory requirements or formal guidance at the local, state or national level; if the proposed disclosure would result in unintended consequences, such as creating a competitive disadvantage; and whether the company incorporates environmental or social issues in a risk-assessment or risk-reporting framework. In general, we support management disclosure practices that are overall consistent with the goals and objectives expressed above. Proposals with respect to companies that have been involved in controversies, fines or litigation are expected to be subject to heightened review and consideration.

Our Capabilities

Our flexible approach solves for client-specific goals across a range of sustainable investment solutions

We recognize that sustainable investing represents a broad set of opportunities and that clients may choose to implement their views based on explicit portfolio objectives. With that in mind, we offer an array of investment solutions to meet our clients’ financial goals and non-financial objectives. Many of our core investment capabilities incorporate ESG factors into their analysis with the primary goal of delivering exceptional investment returns. Our broad product depth and global research allow us to partner with clients to meet their needs across a spectrum of solutions, including strategies that incorporate a variety of sustainable capabilities.

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Source: JPMAM as of December 31, 2016

To learn more

Contact your J.P. Morgan Representative or visit www.jpmorgan.com/esg