EOS Engagement Plan 2021-2023 - Public version - Hermes Investment (2024)

EOS EngagementPlan2021-2023Public version www.hermes-investment.com For professional investors only

2 Introduction EOS – Our About EOS approach to Engagement EOS at Federated Hermes is a leading stewardship service provider. Our engagement activities enable long-term institutional investors to be more active owners of their assets, through dialogue with companies on environmental, social and governance issues. We believe this is essential to build a global financial system that delivers improved long-term returns for investors, as Voting well as better, more sustainable outcomes for society. We make recommendations that are, where practicable, engagement-led and involve communicating with company management and boards around the vote. This ensures that our rationale is understood by the company and that the recommendations are well-informed and lead to change Our Engagement Plan is client-led – where necessary. we undertake a formal consultation Screening process with multiple client touchpoints each year to ensure it is We help our clients to fulfil their stewardship obligations by based on their long-term objectives, monitoring their portfolios to regularly identify companies that are in breach of, or near to breaching, international covering their highest priority topics. norms and conventions. Advisory We work with our clients to develop their responsible ownership policies, drawing on our extensive experience and expertise to advance their stewardship strategies. Our services Public The EOS advantage Voting policy A Relationships and access – Companies understand Engagement that EOS is working on behalf of pension funds and other large institutional investors, so it has significant Screening Advisory leverage – representing assets under advice of US$1.3tn as of 31 December 2020. The team’s skills, experience, languages, connections and cultural understanding equip them with the gravitas and credibility to access and maintain constructive relationships with company boards. Engagement A Client focus – EOS pools the priorities of like-minded investors, and through consultation and feedback, We engage with companies that form part of the public determines the priorities of its Engagement Plan. equity and corporate fixed income holdings of our clients to seek positive change for our clients, the companies and the A Tailored engagement – EOS develops engagement societies in which they operate. strategies specific to each company, informed by its deep understanding across sectors, themes and Public policy markets. It seeks to address the most material ESG risks and opportunities, through a long-term, constructive, Engaging with legislators, regulators, industry bodies and objectives-driven and continuous dialogue at the other standard-setters to shape capital markets and the board and senior executive level, which has proven to environment in which companies and investors can operate be effective over time. more sustainably.

Executive summary 3EOS focuses its stewardship on the issues A Conduct, culture and ethics: developing a corporate culturewith greatest potential to deliver long‑term that puts customers first and treats material stakeholders fairlysustainable wealth for investors and positive to help build a stronger, fairer and more equal society.societal outcomes. To enable delivery of these outcomes, we seek robustStewardship outcomes governance and management by companies of the most material long-term drivers of wealth creation, from both a company valueWe believe the purpose of investment is to create wealth and societal outcome perspective, including:sustainably over the long term. Effective stewardship is theprincipal activity for institutional investors to deliver this for A Corporate governance – encompassing effective boardsinvestors. Our engagement is therefore focused on ensuring composed of primarily independent individuals representingcompanies are responsibly-governed and well managed to the diversity of stakeholders the company serves; thedeliver sustainable long-term value as well as improving the alignment of executive remuneration with the creationlives of employees, promoting diversity and supporting of long-term value while paying strictly no more than iscommunities. Companies should do this while contributing necessary; and the establishment and protection of allto wider society by paying taxes and promoting improvements material shareholder rights.to, and safeguarding the environment and health. When A Strategy, risk and communications – the clear articulation ofmaterial and relevant, these factors will drive improved financial a company’s purpose in order to deliver long-term value to allperformance by companies to the benefit of investors1. stakeholders, supported by a sustainable business model and strategy that addresses the needs of its different stakeholders;Specific environmental and social outcomes, aligned to the UN’s robust risk management practices to protect long-term value;Sustainable Development Goals (SDGs) that we seek include: and transparent, timely disclosures of reliable information sufficient for investors and wider stakeholders to makeA Climate change: ensuring company strategies and actions are informed decisions on long-term investment. aligned to the goals of the Paris Agreement to limit climate change to well below 2°C and, ideally to 1.5°C. Achieving sustainable wealth creation requires investors to become active owners, fulfilling their stewardshipA Natural resources: building a circular economy to achieve responsibilities by: sustainable levels of consumption to ensure affordable access to food, clean water and critical natural resources, while A Monitoring companies’ performance and identifying the most protecting biodiversity. material issues to be escalated for actionA Pollution: controlling pollution of air, land and water to below A Engaging companies in pursuit of meaningful objectives, harmful levels for humans and other living organisms. measuring and reporting on outcomesA Human rights: respecting all human rights linked to a A Exercising shareholder rights including voting on all relevant company’s operations, products and supply chains, including shareholdings through the provision of affordable essential goods and services to help reduce poverty. A Integrating stewardship into investment decisionsA Human capital and labour rights: improving human capital A Advocating for necessary changes in public policy and market and safeguarding labour rights to achieve a healthy, skilled best practice. and productive workforce inclusive of the full diversity of Where effective, investors should also work collectively in pursuit wider society, in the context of rapid technological disruption. of shared objectives to improve outcomes for all. Our engagement is focused on ensuring companies are responsibly-governed and well managed to deliver sustainable long-term value as well as improving the lives of employees, promoting diversity and supporting communities.1 n example in the academic literature is from Chava (2014): “Environmental Externalities and Cost of Capital”, Management Science, 60(9), 2111- A 2380. Further practitioner examples are the research studies by Hermes Investment Management: “Pricing ESG risks in credit markets” and “Pricing ESG risk in sovereign credit” which are available at www.hermes-investment.com

4 Executive summary Our focus of engagement for 2021 falling short of equal opportunity. It is also important for companies to establish a culture which promotes The global coronavirus pandemic dramatically changed the inclusion in all forms and ensures that no form of prejudice business landscape, as well as our own approach to is allowed. Companies should also develop the desired engagement. The human and economic cost of the pandemic culture and employee proposition to improve workforce has been staggering, with nearly 2m deaths by the start of loyalty and wellbeing in the post-pandemic environment. 2021, global GDP forecast to be 4.4% lower, public debt at record levels and rapidly rising unemployment. For most of A Board effectiveness: In 2021, to enhance the quality of board performance and corporate decision-making, we 2020, we were not able to travel or meet with companies in will focus on ensuring that boards make improvements to person. Instead, we rapidly shifted to face-to-face video-calls, ethnic diversity that at least match the recent progress on which enabled us to achieve our planned level and seniority of gender diversity, with the goal to achieve representation engagement. With some exceptions, we have been reflective of the diversity of the stakeholders it aspires impressed by the response of most companies to the to serve. We will also ask boards to react to the lessons challenges of the pandemic. In addition, despite the learned from the coronavirus pandemic, including pandemic, many larger companies have also maintained a the possibility for more internationally diverse board focus on long-term drivers, with for example over 1,500 appointments, enabled by more effective remote working companies now reported to have net-zero emissions practices. We remain committed to improving a board’s commitments. Over the next year, we will continue our focus “software”, relating to how it functions, in addition to its on the most material drivers of long-term value, with a focus “hardware”, relating to its composition and structure. on four priority themes: In addition, following the pandemic, we will focus on A Climate change: With the UN COP 26 meeting in Glasgow companies putting in place a business purpose and postponed until November 2021, we will continue to focus sustainable business model: on climate change as our number one priority, seeking to achieve robust net-zero corporate strategies. We will A In the near term – corporate response to the pandemic: expand our focus beyond traditional energy intensive The pandemic has highlighted the critical interdependence sectors such as energy supply and transportation by of business with key stakeholders including government seeking Paris-aligned net-zero strategies at the providers and employees, yet these are now at risk from the of capital, focusing on the banks and encouraging the perceived need to achieve shorter-term financial returns. shift to sustainable food systems that avoid deforestation We will encourage and support companies to set a clear and protect biodiversity, among other factors. We will also and meaningful business purpose, which helps guide seek to ensure sustainable approaches to carbon offsetting strategy and identify the actions in the short term to via natural carbon sinks and seek to advance shareholder deliver value over the long term. Meanwhile, following scrutiny of climate transition plans, supported by robust unprecedented government support for business via benchmarking of their quality and performance to date and schemes such as furlough support and central bank shareholder votes at relevant companies. intervention, we will urge companies to act responsibly A Human and labour rights: As we continue to engage in critical areas such as good employment practices, the on this enduring priority theme, we will seek to ensure payment of appropriate levels of corporate taxation and increased vigilance in the protection of human and labour justifiable levels of executive remuneration. rights during and following the coronavirus pandemic, A In the longer term – avoiding the next crisis: The which is exacerbating inequalities, increasing the risks of pandemic has also highlighted the risks to business as unacceptable working conditions such as modern slavery human activity pushes towards and even beyond planetary and low pay and limiting access to fundamental needs boundaries. Therefore, in addition to tackling the climate such as food and medicine, including effective coronavirus crisis, we now expect companies to put in place strategies vaccines. We will further focus on digital rights, such to achieve a net-positive impact on biodiversity, eliminate as challenges to the right to data privacy and freedom deforestation and to avoid contributing to the development of expression through the development of artificial of antibiotic-resistant “superbugs”. Finally, companies must intelligence. We will continue to promote corporate put in place more comprehensive risk management systems application of the “UN Guiding Principles (UNGPs) on to support long-term resilience to the risks of unforeseeable Business and Human Rights at 10” – the next decade of business impacts. implementation of the UNGPs. A Human capital management: The coronavirus pandemic In addition to the above, we will also continue to build on our has shone a light on how well employers treat and engage work in recent years in fast-growing areas of concern including their workforce. In addition, the tragic death of George plastics, the governance and ethics of data management and Floyd has re-energised the anti-racism movement in the US artificial intelligence, sustainable land use and biodiversity and around the world. In 2021, new areas of focus include and fast fashion. These present a full range of engagement asking for a strategy and action plan to close the ethnic pay gap and achieve proportionate ethnic representation at all priorities which we believe continue to advance our clients and levels. Advancing gender equality in company leadership, their beneficiaries towards our shared goal of delivering more senior management and throughout organisations also resilient long-term returns on investment and better, more remains critically important, with many companies still sustainable outcomes for society.

Executive summary 5Engagement progress in 2020During 2020, we engaged with 1,245 companies (2019: 1,043), covering 3,965 identified objectives or issues (2019: 2,854).In 2020, 738 objectives advanced by at least one milestone (2019: 615). # of companies # of issues and # of objectives # of objectives engaged objectives engaged engaged completed Engagement programme 378 2013 913 139 Other companies 867 1952 339 16 Grand Total 1245 3965 1252 155 Environmental 177 141 79 59Social & ethical 89 69 53 20 Milestone 1 Milestone 2 Governance 74 57 44 41 Milestone 3 Strategy, risk, Milestone 4communications 77 50 34 36 0 100 200 300 400 500Corporate engagement objectives and progress 2020In addition, in 2020 we made 52 public policy consultation responses or proactive equivalent such as a letter (2019: 36) and held173 discussions with relevant regulators and stakeholders (2019: 182). Measuring progress – Milestones Our four-stage milestone system allows us to track the progress of our engagement, relative to the objectives set for each company. When we set an objective, we also identify the milestones that need to be achieved. Progress is assessed regularly and evaluated against the original engagement proposal. 4 The company implements a 3 strategy or The company measures to develops a 2 credible address the concern When we set an objective, we The company 1 acknowledges strategy to achieve the also identify the milestones the issue as a Our concern is raised with the serious investor objective, or stretching that need to be achieved. company at the concern, worthy targets are set appropriate of a response to address the level concern Milestone Progress

6 Themes The Engagement Plan’s support for the UN Here are some examples of our engagement in support of Sustainable Development Goals the SDGs: The UN’s 2030 agenda for sustainable development sets out AS DG 3 Good health and wellbeing: we engage across the 17 goals and 169 underlying targets, providing a blueprint for pharmaceutical and healthcare sector on access to medicines a sustainable world. The goals call for action by all countries and healthcare to support this goal. to promote prosperity, economic growth and address social needs while also protecting the natural environment and have AS DG 5 Gender equality: we engage to improve gender been adopted by all UN member states. Our view is that the equality and increase female representation across all levels of long-term success of businesses and the success of the SDGs organisations, in particular at board and executive leadership are inextricably linked. The SDGs help create a more levels. sustainable economy in which businesses can thrive. Similarly, AS DG 7 Affordable and clean energy: much of our work the contribution of businesses seizing market opportunities in under the climate change theme supports this goal, in line with the goals, is vital to delivering the economic growth particular, efforts to increase plans to invest in or purchase necessary to achieve them. renewable energy. Our stewardship work has always focused on improving the AS DG 8 Decent work and economic growth: our engagement sustainability of companies, to boost long-term wealth on human capital management and human rights in the supply creation and achieve positive outcomes for society. We chain supports this goal, particularly by addressing equal pay, therefore believe that all of our engagement work is aligned labour rights and health and safety concerns. to the delivery of the SDGs either directly or indirectly. AS DG 12 Responsible consumption: work to improve energy There is no universally accepted standard or benchmark for or natural resource efficiency, including efforts to build a circular reporting on the SDGs, therefore, we have developed our economy, support this goal. own approach in alignment with our Engagement Plan. AS DG 13 Climate action: all our engagement under the climate This attributes a direct link between one of our change theme, in support of action aligned to the goals of the engagement themes and an SDG if we believe our Paris Agreement, supports this goal. engagement objective at a company directly supports at least one of the UN’s targets underpinning the relevant AS DG 16 Peace, justice and strong institutions: engagements goal or is aligned with the spirit of the goal. It does not on human rights which aim to protect fundamental freedoms, include in our reporting the many engagements which reduce bribery and corruption and eliminate child and forced would more indirectly support the ambition of other SDGs labour support this goal. or corporate governance more broadly. Engagement themes for 2021-23 The chart below illustrates the number of engagement objectives and issues on which we have engaged in the last year, which we believe are directly linked to an SDG (noting that one objective may directly link to more than one SDG). No Reduced poverty inequalities Zero Sustainable cities *OTHER Hunger and communities Good health Responsible consumption Proportion of issues and well-being and production and objectives engaged in 2020 Quality Climate Education action linking to the SDGs Gender Life equality below water Clean water Life and sanitation on land Affordable and Peace, justice and 1,849 of the issues and objectives clean energy strong institutions engaged in 2020 were linked to one or more of Decent work and Partnerships for economic growth the goals the SDGs * This represents the proportion of issues and Industry, innovation objectives assigned to the remaining SDGs. and infrastructure

Themes 7 Engagement themes for 2021-23 A Harmful substance management A Value chain rights A Waste and circular economy A Protection of basic rights initiatives A Indigenous rights and traditional A Major pollution incidents communities Pollution, Human and A Biodiversity and waste and labour rights A Diversity and inclusion sustainable land use circular economy A Terms of employment A Sustainable food systems A Health, safety and wellbeing Natural Human A Water stress resource capital stewardship management A Ethical culture and A Strategy and action Environment Social anti-bribery and corruption A Governance and lobbying A Artificial intelligence and A Disclosure Climate Conduct, data governance change culture and A Responsible tax practices ethics Stewardship A Composition and structure A Audit and accounting A Dynamics and culture A Sustainability reporting A Evaluation and succession A Integrated reporting Board Strategy, risk & Corporate planning effectiveness Governance communication reporting A Structure and metrics A Serious operational risks A Transparency and A Cyber security disclosure Executive Risk A Product risks A Quantum of pay outcomes remuneration management Shareholder Business protection purpose and and rights strategy A Basic protection and rights A Business purpose A Minority protection and rights A Capital allocation A Investor engagement A Long-term sustainable strategyWe address the following themes in our Engagement Plan, Corporate engagementcovering environmental, social, corporate governance, and Long-term outcomes we seek include: all companies to havestrategy, risk management and communication issues. We a business model consistent with net-zero emissions and aninclude a summary of the long-term outcomes we seek and effective transition plan to achieve this by 2050.examples of the near-term corporate objectives we pursue atindividual companies and, more broadly, to improve public Near-term corporate objectives include: development of apolicy and market best practice. These example objectives strategy consistent with the goals of the Paris Agreement,are indicative of those set at individual companies, but each including that each new material capex investment iswould be prioritised and tailored to the circ*mstances of consistent with the Paris goals; science-based emissionsthe company. reduction targets for Scope 1 and 2 emissions and Scope 3 emissions (where a methodology exists, or the equivalent ambition); a public policy position supportive of the ParisEnvironmental themes goals and alignment of both direct and indirect lobbying activity by member industry associations; board oversight Climate change and understanding of climate risks and opportunities; andClimate change continues to be the biggest single issue of adoption and implementation of the Taskforce on Climate-concern for long-term investors. Global emissions must reduce related Financial Disclosures (TCFD) recommendations.to net-zero by 2050 to limit climate change to well below 2°C Public policy and best practiceabove pre-industrial levels, and ideally to 1.5°C. Yet currentlythe world’s economy is on track to deliver over 2.7°C of We support the Climate Action 100+ investor collaboration bywarming. Society is facing a climate emergency, with only acting as the engagement lead for a considerable number ofaround a decade in which to take the necessary action to avoid the top systemically important emitting companies. We applythe worst of the impacts which threaten societal welfare and escalated engagement techniques, including raising issues atstability. The required pace of transition brings many risks, as annual shareholder meetings and supporting shareholderwell as opportunities, to traditional business models through resolutions which support positive change. We also supportnew forms of competition, regulation and physical risks. This effective policy making aligned to the goals of the Parisis already affecting many sectors including the energy sector, Agreement, including support of net-zero greenhouse gaswith coal-based utilities being replaced by renewables; the reduction targets by national governments.shift from diesel to hybrid and electric vehicles; and thetransition to more sustainable sources of food.

8 Themes Corporate engagement Natural resource stewardship Long-term outcomes we seek include: the establishment of fully Our societies and economies depend on the availability and circular business models which capture all materials, leading to continued supply of natural resources and ecosystem services. zero waste; the prevention of contamination of the environment However, climate change and unsustainable land use, amongst by harmful substances; and the avoidance of all industrial other drivers, are causing the depletion of natural capital – one disasters such as oil spills, nuclear accidents and dam failures. million species are at risk from extinction, increased incidence of Near-term corporate objectives include: development of drought and water stress, and significant environmental impacts closed loop strategies to reduce net consumption of from the current food system. This theme covers all aspects of materials through smart product design and innovation; use the protection, preservation and restoration of natural resources, of substitute materials that are commonly recycled or reused including water, healthy soils, biodiversity, tropical rainforests and have lower environmental impact; development and and other ecosystems. It also highlights the importance of implementation of best practice strategies for harmful transitioning to sustainable food systems and taking measures substance management or catastrophic spills. against antimicrobial resistance (AMR), including through diversification from animal to plant-based and sustainable protein. Public policy and best practice Corporate engagement We will seek to improve investor engagement on this theme by: promoting investor expectations for plastics and packaging Long-term outcomes we seek include: the protection and in the chemicals, consumer goods and retail sectors and fast restoration of biodiversity, including the ambition to have fashion in the apparel sector; encouraging sign up to the Ellen a net-positive impact on biodiversity, and the long-term MacArthur Foundation New Plastics Economy Global rehabilitation of landforms, such as tropical rainforests; Commitment; continuing to be an active member of the PRI sustainable food systems, including supply and demand that plastics working group; and encouraging mining companies to supports a growing global population with a healthy diet follow best practice tailings management and other pollution within planetary boundaries; and access to clean water for all. controls of the International Council on Mining and Metals. Near-term corporate objectives include: assessment of impacts and dependencies on biodiversity and ecosystem services; Social themes the ambition to have a net-positive impact on biodiversity, including throughout the supply chain; strategies to eliminate Conduct, culture and ethics contributions to deforestation and source high impact feedstocks (eg palm oil, soy, beef) sustainably; a long-term We expect every company to aspire to the highest ethical sustainable food strategy and supporting targets, including standards and to go beyond legal compliance. Conduct, culture diversification from animal to plant-based protein and a plan and ethics underpin how companies conduct business and to address AMR; and ambitious strategies to manage water interrelate with their stakeholders. This has a profound effect use, especially in water-stressed areas, to maintain operational on vital aspects of corporate life including: corporate purpose, resilience and a social licence to operate. board and management performance, health and safety, human capital, diversity and inclusion, corporate advocacy and Public policy and best practice lobbying for good public policies and governmental action to We have signed up to the Finance for Biodiversity Pledge, support more sustainable business practices, and the approach through which we will collaborate and share knowledge with to taxation policy and practice. The trend of digitalisation financial sector peers on halting and reversing biodiversity has created big data which is now combined with powerful loss. We will continue engagement and collaboration with the computing capacity and machine learning techniques, FAIRR network on sustainable use of antibiotics within animal commonly referred to as artificial intelligence (AI), now farming and protein diversification. We have also signed up requires oversight to ensure ethical outcomes. In addition, to the Investor Action on AMR initiative. We will continue to companies should adopt responsible tax practices to participate in a range of collaborative investor initiatives that preserve their reputation and social licence to operate. are focused on tackling deforestation. Corporate engagement Long-term outcomes we seek include: corporate decision Pollution, waste and circular economy making taken through an ethical lens, with development and maintenance of the highest ethical standards and an end to There is increasing need and opportunity for a shift from corporate bribery and corruption and other non-compliance; linear to circular business models, which is central to future- the ethical use of data; and fair tax paid, putting an end to tax proofing businesses and reducing negative impacts on the arbitrage and aggressive tax avoidance. environment. Key areas of concern are plastics pollution, fast fashion and electronic waste. Environmentally harmful Near-term corporate objectives include: a public statement pollution and waste, whether from operations, supply chains and board responsibility to aspire to the highest ethical or products is inconsistent with a long-term sustainable standards; disclosure of principles for the effective business model. Investor concerns, reflecting the threat of management of AI, together with a clear action plan to fines and loss of social licence to operate, as well as the harm implement policies on data ethics, security and privacy issues; done to wider society and investments including air pollution, and a policy commitment to pay tax in each country in line the leakage of single-use plastics into the ocean and with the spirit and intention of the law. catastrophic oil spills or tailings dam leaks is rising.

Themes 9Public policy and best practice total reward package similarly valued by employees; a policyWe support the development of market best practices that permits freedom of association of workers in traderecommended by reputable corporate ethics organisations unions and protects labour rights recognised by thesuch as the Institute of Business Ethics and anti-bribery and International Labour Organization; commitment to providecorruption organisations such as Transparency International. sufficient paid sick leave; and development andWe will continue to advocate public policy efforts at an implementation of a human capital management strategy forinternational level and individual country levels to achieve the promotion of best practice physical and mental wellbeinggreater tax transparency. in the workplace. Public policy and best practice Human capital management We support government backed initiatives to increase theIn a knowledge economy where intangible assets such as diversity of executive management, such as via the localhuman capital are estimated to comprise on average more chapter of the 30% Club, with a focus on developing markets.than 52% of a company’s market value (according to EY’s We will also support stakeholder collaboration to defineEmbankment Project for Inclusive Capitalism), it is vital that useful standards, through active contribution to initiativescompanies look beyond physical assets to understand the such as the Workforce Disclosure Initiative (WDI) and thesources of long-term value. The coronavirus pandemic and US Human Capital Management Coalition.social movements such as Black Lives Matter have magnifiedthe focus on how employers treat and engage their Human and labour rightsworkforce. Our engagement focuses on all aspects ofemployment and the future of work. The UN SDGs bring Respect for human and labour rights is a priority on theadditional leverage through three goals focused on the investor agenda as it underpins a company’s wider corporatepursuit of gender equality, reduced inequalities and decent culture, business ethics and enterprise risk management, allwork and economic growth. Important aspects of successful of which affect the creation and preservation of long-termhuman capital management include: diversity, inclusion and value. All companies have a responsibility to respect humanfull representation of workers; fair wages, incentives and rights which can include decent work such as no forcedbenefits; and health, safety and wellbeing. labour, no child labour and payment of living wage; the safeguarding of indigenous communities and those livingCorporate engagement in high-risk environments (such as conflict zones); and theThe long-term outcomes we seek are: equal representation protection of basic human rights.and inclusion throughout the organisation across all Corporate engagementdimensions of diversity; fair wages and benefits paid so allemployees can afford a decent standard of living; and zero The long-term outcomes we seek include: no companyserious work injuries. causing or contributing to human or labour rights abuses whether in their own operations or supply chain and effectiveNear-term corporate objectives include: a strategy and action remedy is provided in case of any harm; access for all peopleplan to close the gender and ethnicity pay gap and achieve to basic human needs such as affordable nutritious food,appropriate representation at all levels of an organisation; healthcare and the internet; and full respect for the humanimplementation of a minimum real living wage across rights of all indigenous people including those living in highoperations and the supply chain or evidence of an equivalent risk zones such as occupied territories. Near-term corporate objectives include: the development of a business model aligned to the elimination of human and labour rights abuses including modern slavery and fair pay; The coronavirus pandemic and social development of food product formulations that can support a movements such as Black Lives balanced diet; and the adoption of human rights policies and Matter have magnified the focus on procedures in line with UN Guiding Principles on Business how employers treat and engage and Human Rights. their workforce. Public policy and best practice We will continue to work with key stakeholders such as the Organisation for Economic Co-operation and Development Responsible Minerals Initiative and Better Cobalt on the responsible sourcing of cobalt. We will work with the Find It, Fix It, Prevent It investor collaboration to tackle modern slavery. We will support the adoption of guidance on how companies can implement higher wages aligned to their commitments to pay a living wage to supply chain workers and promote best practices in the use of technology to improve supply chain transparency and to provide data on working conditions. We will liaise with the Global Network Initiative on how we can integrate the Principles on Freedom of Expression and Privacy into our engagements with ICT companies.

10 Themes Corporate governance themes Board effectiveness There is considerable evidence that the performance of the board is vital to the long-term success of a company, with a range of factors contributing to this. Boards should be composed of directors with technical skills aligned with the An effective board should be strategic needs and direction of the company and a diversity of perspectives (including across gender, age, ethnicity, involved in constructive dialogue nationality, background, skills and experience) to improve with investors, the workforce and decision making. Equally important is that boards contain other key stakeholders. enough independent directors to challenge management and that directors are able to dedicate sufficient time to fulfil their duties. Board effectiveness also requires robust supporting structures and processes, such as a proper induction upon appointment and ongoing training, a separate chair and CEO with clearly defined responsibilities, and effective committees with accurate, timely and clear information. An effective board should be involved in constructive dialogue with investors, the workforce and other key stakeholders. It should also be subject to regular independent evaluation. structures and practices are generally not fit for purpose, with Corporate engagement some recent practices, such as introducing structures to gear the majority of pay towards performance-based pay, may The long-term outcomes we seek include: a diverse board have been well-intentioned but have proved ineffective with composition aligned to the strategic needs of the company, unintended consequences such as escalating quantum and reflective of the diversity of the stakeholders it serves, including encouraging short-termism or financial engineering. The employees and customers; effective boards with meaningful pandemic in 2020 served as a reminder of the limitations of participation of all members and appropriate allocation of time, pay schemes reliant on stock options or performance-based verified by independent evaluation; and structured succession incentives schemes. We therefore wish to see simpler, more planning in place, accounting for strategic changes and transparent pay schemes with the reduction of variable, unexpected situations. performance-based elements in pay, replacing these with Near-term corporate objectives include: additional female higher fixed pay, paid primarily in shares held for the long term. directors appointed with the goal of achieving at least 30% Corporate engagement women on the board, or higher in relevant markets, with interim goals in place depending on the market context, such as at least The long-term outcomes we seek include: executives being 20% women on the board in Brazil, Russia and China, and at rewarded for behaviour aligned to the desired corporate least one woman on the board in South Korea; board culture; simple, understandable pay schemes that incentivise composition assessed to consider and improve ethnic diversity delivery of long-term sustainable value; clear disclosure and racial equality; additional independent directors appointed explaining the nature and appropriateness of awards; and fair to achieve at least 50% independence at dispersed ownership levels of pay that clearly align with performance and can be companies and 30% in concentrated ownership companies; justified to employees, investors and other stakeholders. improved focus on aspects of a board’s “software” (rather than “hardware”), including the allocation of time to strategic versus Near-term corporate objectives include: pay schemes operational issues; and independent board evaluation designed to support the desired culture of the organisation, conducted at least every three years, including an assessment of including consideration of whether behaviours and decisions board dynamics and culture. incentivised are sufficiently long-term and aligned to fulfilling the organisation’s purpose; alignment of incentive plans to Public policy and best practice the strategic drivers of long-term value, rather than over- reliance on relatively short-term measures such as total We will continue to promote our Guiding Principles for an shareholder returns or earnings; simple pay structures, Effective Board paper in different markets via conferences seeking at most two forms of concurrent variable pay and local market best practice engagement. We support schemes; full disclosure of pay structures, including metrics initiatives to promote board gender diversity, including and potential award size; and clear and timely reporting of initiation of local chapters of the 30% club. We will advocate targets, performance and pay outcomes, enabling investors for minimum levels of racial and ethnic diversity, as well as to judge the appropriateness of awards. encouraging improved disclosure and ethnicity pay gap reporting, in local corporate governance codes and Public policy and best practice authoritative guidelines. In the US and UK, we will work with groups such as the US Council for Institutional Investors and the UK Corporate Executive remuneration Governance Forum to set best practice guidelines for higher shareholdings, reduced variable pay and the adoption of Pay structures are a critical tool for aligning the activities of restricted stock models. In Europe, we will encourage further management with a company’s purpose, strategy and alignment on higher shareholdings and greater disclosure of performance. In some markets we believe that compensation pay structures and outcomes, particularly in France, Sweden

Themes 11 research; and encourage and support implementation of ambitious stewardship codes and effective EU member state Protecting and enhancing transposition of the amended Shareholder Rights Directive. shareholder rights is critical to the long-term success of companies. Strategy, risk and communication themes Business purpose and strategy This theme covers all aspects of how a company creates and preserves value over the long term. It includes business purpose, long-term strategy and sustainable business model, and capital allocation policy. These then guide a company’sand Denmark. In Asia and emerging markets, our focus is on key choices around how to deploy limited resources,improving disclosure, demonstrating a clear link between pay including financial and human capital, and its chosenand performance and discouraging use of share options, operating behaviours and underlying culture. Recent events,particularly in China and Hong Kong. such as the pandemic and the 2019 Business Roundtable Statement of Purpose, have intensified the focus on business purpose and the role of corporations in society. Shareholder protection and rights Corporate engagementProtecting and enhancing shareholder rights is critical to The long-term outcomes we seek include: an enduringthe long-term success of companies, as it ensures that business purpose that explains why the company exists andcompanies remain accountable to long-term investors, rather which meets the needs of society profitably; a long-termthan becoming ownerless. Shareholders exercise control strategy and sustainable business model that creates andover the future direction of a company through rights such preserves value for shareholders and wider stakeholders byas the ability to propose candidates for election to the delivering positive societal outcomes; and a capital allocationboard, sometimes referred to as proxy access; or proposing policy that delivers optimal returns over the long term forshareholder resolutions (whether advisory or legally binding). investors and wider stakeholders.It is also important to protect minority rights of investors,through measures such as: the avoidance of poison pill Near-term corporate objectives include: a publishedarrangements that limit potential changes of control; the statement of purpose that defines the company’s businesselimination of strategic cross-shareholdings between purpose (why it exists) and which identifies the stakeholderscompanies (common in Japan); and avoiding dual or multi- most critical to long-term value creation through deliveryclass share structures with unequal voting rights. of positive societal outcomes; a long-term strategy and sustainable business model (including forward-lookingCorporate engagement metrics and indicators) which shows how the company’sThe long-term outcomes we seek include: the protection of stated purpose is operationalised, including how it deliversbasic shareholder rights to ensure confidence to invest capital positive societal outcomes and long-term value to its criticalover the long term with favourable returns; the protection of stakeholders; a published capital allocation policy thatminority shareholder rights to ensure confidence to invest in includes policies pertaining to research and development;companies controlled by larger shareholders; and good mergers and acquisitions; reinvestment in company growth;access for investors to boards and management, so as to dividends and buybacks; and debt retirement.influence companies to act in their long-term interests. Public policy and best practiceNear-term corporate objectives include: establishment of a We identified over 60 potential corporate leaders in businessregular dialogue between shareholders and non-executive purpose, and invited their board directors to join the steeringdirectors; the removal of anti-takeover (poison pill) groups of the Enacting Purpose Initiative, which will producearrangements; the reduction or elimination of strategic guidance on how business purpose should be formed andshareholdings by Japanese companies; and the promotion used to guide long-term strategy and capital allocation.of the one-share, one-vote principle, especially including at We continue to support the Chief Executives for Corporatetimes of major change at the company, such as a change of Purpose (CECP) and Focusing Capital on the Long Termcontrol of ownership or major capital raising. Global (FCLT Global). In the US, we are asking companies how they plan to comply with the Securities and ExchangePublic policy and best practice Commission’s 8 April 2020 guidance on the need forWe will continue to: resist proposals to allow premium listings disclosure of forward-looking health and welfare strategies.of multiple class shares at various stock exchanges aroundthe world; push Japanese regulators for tighter disclosurerequirements on cross-shareholdings; advocate for the USSecurities and Exchange Commission to regulate proxyadvice in a way that could increase the independence of such

12 Themes Corporate engagement Corporate reporting The long-term outcomes we seek include: risks assessed from the perspective not only of financial impact, but also Corporate reporting covers all aspects of reporting by maintenance of a social licence to operate, which is companies to their stakeholders, whether financial or non- underpinned by a corporate purpose centered on being financial information, statutory or voluntary. Transparent sustainable and creating long-term stakeholder value; an reporting is essential to enable shareholders and wider effective risk management framework, designed to identify, stakeholders to understand and assess the companies in which assess and manage the company’s strategic, operational, they have an interest and to measure performance over time. compliance and financial risks; and a culture that seeks to Over the last decade, we have seen an increase in voluntary apply the board’s chosen risk appetite and which is and mandatory reporting frameworks such as the guidelines of established across all parts of the organisation. the TCFD and the Sustainability Accounting Standards Board (SASB) standards. Further regulatory requirements for Near-term corporate objectives include: an authentic enhanced non-financial reporting are expected. business purpose communicated externally and embedded internally with the board and senior management putting Corporate engagement purpose into practice through the company’s strategy; a risk The long-term outcomes we seek include: timely, reliable and management framework which reflects the activities and comprehensive reporting which enables investors and other complexities of the business; the board and senior stakeholders to accurately appraise past performance and management, in their respective roles set clear expectations future prospects of a company; comprehensive reporting of for the culture of the organisation with specific reference to all material elements of a company’s impact on wider society; the firm’s overall risk appetite. company explanations through integrated reporting on how value is created over time. Public policy and best practice We will continue to support the PRI’s collaborative initiative Near-term corporate objectives include: the adoption of on cyber security. prudent accounting standards; ensuring best practices in audit tendering and rotation; sustainability reporting aligned to best practice frameworks such as the Global Reporting Initiative, SASB and the TCFD; and analysis of how corporate activity is aligned to delivery of the SDGs. Public policy and best practice We will support the development and adoption of standardised reporting frameworks applicable to the most material long-term value areas, with particular emphasis on human capital, such as through the WDI. Risk management The management of risk is essential to creating and preserving sustainable long-term value. High-profile business failures (such as a harmful faulty product, an oil spill, a dam collapse and poor lending practices leading to major financial losses) and more recently the coronavirus pandemic have increased the attention to risk management by companies and their shareholders. Although pandemic risk was on the risk registers of many companies as a low-likelihood, high- impact event, the pandemic has shown that companies were not prepared for the full magnitude of government interventions in response to this type of public health risk, including the full lockdown of economies. A board and management team must first articulate to investors the level of risk appetite, and then monitor and manage risks within this boundary. Management has the responsibility to implement an effective risk management framework, designed to identify, assess and manage the company’s strategic, operational, compliance (including legal and regulatory risks) and financial risks. We focus on management frameworks to avoid and, if necessary, remediate operational risks which include: serious operational risks (including catastrophic risks); product risks; and as digital technology is increasingly critical to a company’s operations – cyber security risks in various forms.

Federated HermesFederated Hermes is a global leader in active, responsible investing.Guided by our conviction that responsible investing is the best way to create long-term wealth, we providespecialised capabilities across equity, fixed income and private markets, multi-asset and liquidity managementstrategies, and world-leading stewardship.Our goals are to help people invest and retire better, to help clients achieve better risk-adjusted returns, and tocontribute to positive outcomes that benefit the wider world.All activities previously carried out by Hermes now form the international business of Federated Hermes.Our brand has evolved, but we still offer the same distinct investment propositions and pioneering responsibleinvestment and stewardship services for which we are renowned – in addition to important new strategies fromthe entire group.Our investment and stewardship Why EOS?capabilities: EOS enables institutional shareholders around the world to meet their fiduciary responsibilities and become active Active equities: global and regional owners of their assets. EOS is based on the premise that Fixed income: across regions, sectors and the yield curve companies with informed and involved investors are Liquidity: solutions driven by four decades of experience more likely to achieve superior long-term performance than those without. Private markets: real estate, infrastructure, private equity and debt Stewardship: corporate engagement, proxy voting, policy advocacyFor more information, visit www.hermes-investment.com or connect with us on social media:For professional investors only. This is a marketing communication. Hermes Equity Ownership Services (“EOS”) does not carry out any regulated activities. Thisdocument is for information purposes only. It pays no regard to any specific investment objectives, financial situation or particular needs of any specific recipient.EOS and Hermes Stewardship North America Inc. (“HSNA”) do not provide investment advice and no action should be taken or omitted to be taken in relianceupon information in this document. Any opinions expressed may change. This document may include a list of clients. Please note that inclusion on this list should notbe construed as an endorsem*nt of EOS’ or HSNA’s services. EOS has its registered office at Sixth Floor, 150 Cheapside, London EC2V 6ET. HSNA’s principal office isat 1001 Liberty Avenue, Pittsburgh, PA 15222-3779. Telephone calls will be recorded for training and monitoring purposes. EOS000759 00009887 01/21