Japan Stewardship Code

Nikko Asset Management (Nikko AM) adopts the “Principles for Responsible Institutional Investors”, also known as “Japan's Stewardship Code”, in relation to our investments in publicly traded Japanese stocks. We also accept and promote the principles of the Code for other investment assets, especially fixed income securities issued by Japanese companies.

Acceptance of the Stewardship Code

“Japan's Stewardship Code” was established under the auspices of the Financial Services Agency in February 2014 as a guide for institutional investors to “promote sustainable growth of investee companies and enhance the medium- and long-term investment return for clients and beneficiaries.” In light of the contents of statements released by the Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code and other such changes, a revised version of the Code was released about three years later in May 2017. Nikko AM takes a global approach to the Code, focusing on the core components of stewardship.

The council later released a new statement in April 2019 based on continued discussions regarding further enhancements to corporate governance reforms after the above-mentioned revision. This led to the announcement of a further revision of Japan’s Stewardship Code in March 2020.

In accordance with Japan’s Stewardship Code, Nikko AM aims to increase medium- and long-term returns on the assets entrusted by investors mainly by analysis of and appropriate engagement with investee companies and the exercising of voting rights. Nikko AM’s engagement with companies also takes into consideration their medium- and long-term sustainability, including ESG*1 factors, in accordance with its investment management strategies. As an asset manager, Nikko AM places fiduciary principles*2 at the heart of all its values and business activities. It also constantly prioritizes the interests of its customers as their chosen fiduciary. Nikko AM believes that the concept of ESG is essential to putting fiduciary principles into practice and works to fulfill its fiduciary duty at all stages of investment decisions.

Japan's Stewardship Code adopts established international practices in its “Principles-Based Approach” (as opposed to Rules-Based), and its “Comply or Explain” provision allowing institutional investors to explain why they may not comply with some aspects of the Code. Moreover, the fact that “constructive dialogue” with investee companies can be based on public information is an effective measure, in Nikko AM’s view.

^*1: “ESG” means Environment, Social and Governance. An ESG Investment Strategy is a strategy that evaluates corporate value by taking into account ESG factors.

^*2: The general term for a wide range of roles and responsibilities assumed in order to perform certain services for others.

Views and Policies on the Stewardship Code

1. Institutional investors should have a clear policy on how they will fulfill their stewardship responsibilities, and publicly disclose it.

Nikko AM is a global multi-asset manager providing clients with various investment strategies. Its top priority is to serve the interests of its clients through long-term investments in all asset classes. As indicated in Nikko AM’s Code of Conduct Regarding Fiduciary & ESG Principles, the inclusion of ESG factors and promotion of stewardship activities in investment processes is consistent with Nikko AM’s work to fulfill its fiduciary duty in terms of creating long-term value. In order to be sustainable, all organizations need to meet current needs by addressing the issues and risks of today without harming the prospects of future generations. Nikko AM’s practice of realizing sustainability in its own organizational management is in line with its sustainability policy, while its Code of Ethics and Business Conduct expresses Nikko AM’s thinking on its core values, its social responsibility as a firm, and how to be a global citizen.

Nikko AM became a signatory to the United Nations’ Principles for Responsible Investment (PRI) in 2007. By signing up to the PRI soon after they were launched, Nikko AM demonstrated its commitment to seriously addressing all six of them as part of its fiduciary responsibility. Nikko AM incorporates ESG factors in the processes for all of its investment strategies.

⮚ Corporate Missions and Fiduciary & ESG Principles
Code of Conduct Regarding Fiduciary & ESG Principles
http://en.nikkoam.com/fiduciary-and-esg-principles

⮚ Sustainability Initiatives
https://en.nikkoam.com/sustainability#corporate-sustainability

⮚ Nikko AM’s Commitment to Responsible Investing
http://en.nikkoam.com/about-us/esg

⮚ Code of Ethics
http://en.nikkoam.com/code-of-ethics

Nikko AM fulfills its stewardship duties by ascertaining the statuses of the firms it invests in, engaging with them and exercising voting rights in their shareholder meetings based on publicly available information. The sustained growth of a company is influenced by various factors, such as company culture, management vision, business and financial strategies, corporate governance and relationships with stakeholders. The degree of influence of each factor differs depending on the company's growth phase. Through appropriate engagement and analysis, Nikko AM has an investment management process with which it makes decisions on corporate value. With regard to management strategies, shareholder return policies and ESG strategies, Nikko AM engages in research appropriate to each company's growth phase. In accordance with its emphasis on the exercising of voting rights as an opportunity to express its opinion to investee companies, Nikko AM established the Stewardship and Proxy Voting Committee and created the Stewardship and Voting Rights Policy Oversight Committee as a body to oversee the former committee. Through monitoring, oversight and advice based on the Guidelines on Exercising Voting Rights and the Standards for Exercising Voting Rights on Japanese Stocks, the Stewardship and Voting Rights Policy Oversight Committee works to ensure that Nikko AM exercises its voting rights appropriately after first establishing whether or not the proposed agenda items will contribute to medium- to long-term growth in corporate value. From its perspective as a body composed of a majority of external members with no special interests in Nikko AM, the Stewardship and Voting Rights Policy Oversight Committee monitors and oversees whether Nikko AM’s exercising of voting rights and other stewardship activities are in line with its objectives and whether it is making the proper efforts to fulfill its fiduciary duties consistently. The committee also provides necessary advice from a fair and neutral standpoint.

⮚ Guidelines on Exercising Voting Rights
https://en.nikkoam.com/voting-rights#votingrights2

⮚ Standards for Exercising Voting Rights on Japanese Stocks
https://en.nikkoam.com/voting-rights#votingrights3

2. Institutional investors should have a clear policy on how they manage conflicts of interest in fulfilling their stewardship responsibilities and publicly disclose it.

When conducting analysis, appropriate engagement or exercising voting rights, for example, if Nikko AM invests in an affiliated company, an investee company or a client (including companies with connections to a client), the possibility of conflicts of interest cannot be ruled out.

Nikko AM Group companies and related parties provide a variety of services. In order to ensure that the interests of customers are not unduly harmed, Nikko AM has publicly disclosed a summary of its Conflict of Interest Control Policy in accordance with laws and regulations. Nikko AM ensures that business is conducted appropriately by properly managing transactions and other such conduct with possible conflicts of interests based on the Policy. Nikko AM manages transactions and other such conduct with possible conflicts of interests in order to ensure that customer interests are not unduly harmed by identifying the conduct as transactions that need to be managed based on classifications stipulated in internal regulations.

Nikko AM manages conflicts of interests in stewardship activities including engagement and exercising voting rights based on its classification of such activities as “exercising influence”. Specifically, it works to prevent Nikko AM Group companies and other such entities from exercising influence, and to ensure that stewardship activities are conducted appropriately, by stipulating reasonable decision-making standards for such activities and ensuring that they are conducted under the supervision of the Stewardship and Proxy Voting Committee. Stewardship activities are also monitored and overseen by the Stewardship and Voting Rights Policy Oversight Committee, the majority of whose members are from outside Nikko AM.

Nikko AM envisages that conflicts of interests may arise when it exercises voting rights in regard to the entities listed below. In order to avoid conflicts of interest and enable objective decision making in its exercise of voting rights, it has established the following control framework to maintain appropriate voting decisions pursuant to Item 4 of Article 3 of the Company's Guidelines on Exercising Voting Rights.

(i) Parent company: Nikko AM refers to the opinions of external third parties when making voting decisions regarding its parent company. It also ensures that its judgments are neutral and transparent by having them deliberated over by the Stewardship and Voting Rights Policy Oversight Committee.

(ii) Distributors: The exercise of voting rights regarding listed financial institutions that distribute Nikko AM’s products creates a risk of conflicts of interest regardless of whether Nikko AM has a capital relationship with the entity. When exercising voting rights regarding one of its distributors, Nikko AM not only refers to the opinions of external third parties, but also confirms whether its voting decisions give the highest priority to the interests of its clients and beneficiaries and fulfill Nikko AM’s stewardship responsibilities by reporting all proposals it votes on to the Stewardship and Voting Rights Policy Oversight Committee in order to receive fair and neutral advice and oversight.

(iii) Clients with which Nikko AM has a business relationship: Exercising voting rights regarding listed clients and entities with which Nikko AM has a business relationship also carries the risk of conflicts of interest arising. Therefore, when voting regarding clients and entities with which it has a business relationship, Nikko AM also refers to the opinions of external third parties and reports all proposals it votes on to the Stewardship and Voting Rights Policy Oversight Committee in order to receive fair and neutral advice and oversight.

⮚ Conflict of Interest Control Policy
https://en.nikkoam.com/conflict-of-interest-control-policy

⮚ Guidelines on Exercising Voting Rights
http://en.nikkoam.com/voting-rights#votingrights2

⮚ Standards for Exercising Voting Rights on Japanese Stocks
http://en.nikkoam.com/voting-rights#votingrights3

3. Institutional investors should monitor investee companies so that they can appropriately fulfill their stewardship responsibilities with an orientation towards the sustainable growth of the companies.

Nikko AM formulated and publicly released the Nikko Asset Management Group Engagement and Stewardship Strategy in March 2022. The document is intended to describe engagement with investee companies undertaken by investment management teams throughout the Nikko Asset Management Group in Japan and overseas, including Objectives, Methods and execution, Prioritisation, Documentation monitoring and reporting, Collaborative engagement, and Escalation. Engagement for asset management strategies provided by Nikko AM and all other companies in the Nikko Asset Management Group is conducted based on this strategy.

⮚ Nikko Asset Management Group Engagement and Stewardship Strategy
https://en.nikkoam.com/files/pdf/esg/global_engagement_and_stewardship_strategy_en_2022.pdf

Nikko AM’s fund managers and analysts endeavour to accurately assess investee companies based on publicly available information. Their research covers financial information, such as earnings trends and capital structures, as well as non-financial information like management strategies and firms’ ESG strategies.

Nikko AM assesses the corporate value of Japanese listed stocks based on comprehensive analyses that cover non-financial factors in addition to financial information such as earnings forecasts. For example, evaluations of major investee companies include “CSV assessments” that cover non-financial factors including competitive advantages such as brand power as well as ESG values. Nikko AM also recently enhanced its analyses of companies’ ESG strengths by starting to analyse and assess how firms are likely to be impacted by developments such as climate change, particularly the transition to a carbon-free society. Nikko AM’s initiatives in this area include the in-house development and implementation of an application that enables it to calculate the impact of carbon pricing on individual companies, identify the opportunities and risks involved in transitioning to a carbon-free society, and visualize the extent of portfolio carbon risk.

4. Institutional investors should seek to arrive at an understanding in common with investee companies and work to solve problems through constructive engagement with investee companies.

Nikko AM defines engagement as working and communicating with investee companies, based on publicly available information, in order to contribute to their sustainable, long-term growth, primarily through meetings with their management teams aimed at encouraging the companies to discuss and solve the overall challenges they face in enhancing their corporate value. Nikko AM expanded the reach of its stewardship activities in March 2017 with the establishment of the Active Ownership Group under the Equity Fund Management Department. The group drives forward Nikko AM’s equity stewardship activities through engagement with investee companies both in Nikko AM’s active and passive investment management strategies. Engagement is conducted through an organizational approach in which the Equity Research Group and various investment management strategy teams work with the Active Ownership Group on engagement with the companies they research. Specifically, the fund managers and analysts in these groups and teams identify the issues an investee company needs to address in order to enhance its corporate value in the medium and long term, as well as to grow sustainably, based on an accurate understanding of the company’s characteristics, including its management philosophy, its business and financial strategy, and its ESG and risk approaches. They then share their thinking with the investee company and engage with it constructively to resolve the issues identified. Nikko AM engages with a large variety of people ranging from the top managements of firms to employees responsible for finance, corporate planning and other such business managers. Particular efforts have been made recently to include companies’ sustainability departments and outside directors in engagement activities. The results of these activities are shared where appropriate among fund managers and analysts in the relevant groups and teams, and can be useful in corporate value assessments and investment decisions.

Nikko AM has also started to apply PDCA cycles to its engagement with investee companies for which a PDCA policy can be established in advance (milestone management). Under this approach, engagement is limited to activity for which certain items can clearly be established in terms of the engagement themes before engagement is started. These include the identification of issues, goal setting, the details of action to be requested, schedules, and the details of expected results. The specifics of these items are then managed as engagement progresses. Nikko AM intends to enhance the effectiveness of its engagement as well as the transparency of verifications of its results through this approach.

Nikko AM also assigns CSV assessment ratings to major investee companies. CSV assessments determine the extent to which companies create value both for society and their shareholders while also striking the right balance between addressing ESG issues and enhancing their profitability and competitiveness. The assessments are also used for setting engagement themes. In addition, Nikko AM has specified the following three key ESG themes as issues it believes are important to many companies: Action for a Decarbonized Society (E), Human Capital and Productivity (S) and Effective Governance (G). It includes these themes in its engagement.

⮚ Nikko AM’s Key ESG Themes
https://en.nikkoam.com/esg-theme

Nikko AM has a policy to avoid receiving any undisclosed material facts and takes the utmost care to ensure that it does not receive any undisclosed material facts through its stewardship activities. It continuously implements education and training to prevent the acquisition of undisclosed material facts. In the unlikely event that undisclosed material facts are acquired, countermeasures are immediately implemented to prevent insider trading from occurring in accordance with Nikko AM's internal rules for the management of insider trading.

5. Institutional investors should have a clear policy on the voting and disclosure of voting activity. The policy on voting should not be comprised only of a mechanical checklist; it should be designed to contribute to the sustainable growth of investee companies.

Nikko AM established the Stewardship and Proxy Voting Committee and created the Voting Rights Policy Oversight Committee as a body to monitor, oversee and provide advice to the former committee. The Stewardship and Voting Rights Policy Oversight Committee ensures that voting is carried out in accordance with the Guidelines on Exercising Voting Rights and the Standards for Exercising Voting Rights on Japanese Stocks, which the committee administrates to ensure proper voting. Based on the rationale that increased corporate value in the medium- to long-term from sustained growth of investee companies will lead to increases in assets that Nikko AM manages for clients and beneficiaries, Nikko AM votes in favour of agenda items that support this rationale, but will vote against agenda items that do not.

When exercising its voting rights, Nikko AM fully considers the circumstances and initiatives of investee companies as well as the details of its engagement with the companies, and aims to ensure that its voting decisions help each company to grow sustainably and enhance its medium- and long-term corporate value.

⮚ Guidelines on Exercising Voting Rights
http://en.nikkoam.com/voting-rights#votingrights2

⮚ Standards for Exercising Voting Rights on Japanese Stocks
http://en.nikkoam.com/voting-rights#votingrights3

Nikko AM’s carries out Japanese stock lending transactions in accordance with an investment management policy formulated by an internal committee whose members include managers in its investment management, compliance and risk management functions. When lending stocks, Nikko AM strives to make appropriate decisions on securing its voting rights in order to help grow the medium- and long-term investment returns of clients and beneficiaries in light of its aim to promote greater corporate value.

Nikko AM discloses individual results of its voting on the Japanese stocks in which it invests on its website and in press releases every quarter. In addition to records of whether it has voted for or against each proposal, Nikko AM also provides the reasons for its voting decisions on any proposals for which it deems explanations necessary. It also publicly releases the results of voting regarding investee companies by proposal type quarterly and annually. The information includes the total number of proposals voted on as well as whether Nikko AM voted for or against the proposals.

⮚ Voting Rights Results
http://en.nikkoam.com/voting-rights-results

6. Institutional investors in principle should report periodically on how they fulfill their stewardship responsibilities, including their voting responsibilities, to their clients and beneficiaries.

Nikko AM's Stewardship Policy is regularly reviewed. In addition to publishing the results of its exercise of voting rights regarding Japanese equities on its company website, Nikko AM not only discloses how it voted on individual proposals but also provides to individual clients information on voting for stocks held as assets if requested, and the reasons for voting decisions in respect of those stocks.

7. To contribute positively to the sustainable growth of investee companies, institutional investors should develop skills and resources needed to appropriately engage with the companies and to make proper judgments in fulfilling their stewardship activities based on in-depth knowledge of the investee companies and their business environment and consideration of sustainability consistent with their investment management strategies.

In order to appropriately and efficiently implement stewardship activities, Nikko AM has established a Stewardship and Proxy Voting Committee. This committee is mainly comprised of employees in management positions in Nikko AM's fund management and compliance departments and is charged with formulating and periodically reviewing Nikko AM's policy on stewardship activities and the use of voting rights. The committee also formulates and reviews Nikko AM’s overall decision-making process for exercising voting rights, its Guidelines on Exercising Voting Rights and its Standards for Exercising Voting Rights on Japanese Stocks based on the principles in Japan’s Stewardship Code.

Nikko AM also established its Stewardship and Voting Rights Policy Oversight Committee in June 2016 in order to increase transparency in its stewardship activities and strengthen its governance. From its perspective as a body composed of a majority of external members with no special interests in Nikko AM, the Stewardship and Voting Rights Policy Oversight Committee monitors and oversees whether Nikko AM’s exercising of voting rights and other stewardship activities are in line with its objectives and whether it is making the proper efforts to fulfill its fiduciary duties consistently. The committee also provides necessary advice from a fair and neutral standpoint.

The ESG Global Steering Committee was established with the approval of Nikko AM’s Global Executive Committee as a body to oversee how Nikko AM puts its commitment to ESG initiatives into practice. Chaired by the Chief Investment Officer, the committee consists of equity and fixed income investment management team leaders in Nikko AM’s investment offices around the world. The committee assesses the effectiveness of Nikko AM’s approaches to ESG issues and PRI principles, and considers the best methods to realize those approaches.

Nikko AM consistently assesses its own implementation of the principles and policies included in the Code, which helps it to further enhance its stewardship activities. Nikko AM will continue to provide periodic updates of these assessments on its website.

January 11, 2023