Self-Evaluation of the Implementation Status of Japan’s Stewardship Code
(Former Sumitomo Mitsui Asset Management Company)

* Prepared by the former Sumitomo Mitsui Asset Management Company Limited.

[Self-Evaluation]

In FY2017, as in the previous fiscal year, SMAM continued to actively engage in stewardship activities to promote increased corporate value of investee companies for the profit of our customers and their beneficiaries. As a result, we have been conducting a self-evaluation of whether we have ultimately taken a step forward toward the stance that the company is aiming for as posted in our Declaration of Acceptance of the Principles for Responsible Institutional Investors, ‘Japan's Stewardship Code,’ and Public Disclosure of Policies Based on the Code” such as extending the length of the time horizons for research and analysis performed by analysts and fund managers, and promoting the creation of relationships of trust with the investee companies that form the foundation of our engagement.
The main initiatives and reforms that we carried out in FY2017 were as follows.

1. Updated the Fiduciary Action Plan (May)
2. Published the implementation status of the Fiduciary Action Plan and recommendations from the Independent Third-party Committee (May, October)
3. Revised our Declaration of Acceptance of the Principles for Responsible Institutional Investors, ‘Japan's Stewardship Code,’ and Public Disclosure of Policies Based on the Code” based on amendments to the Code by the Financial Services Agency (June)
4. In terms of the exercise of voting rights, we have been exercising voting rights strictly in accordance with the guidelines for all resolutions of all owned companies starting from shareholder general meetings in June 2017, and we began to disclose the results of the exercise of proxy voting rights individually (June, August)
5. Published the “Self-evaluation of the Implementation Status of Japan’s Stewardship Code” for FY2016 (August)
6. Started collective engagement by working together with other institutional investors to conduct dialog with companies (October)
7. Signed the “Principles for Financial Action towards a Sustainable Society (Principles for Financial Action in the 21st Century)” (December)

The following is a report on the “Performance in FY2017” and “Future policies” regarding the implementation status of each of the principles of Japan’s Stewardship Code.

[Performance for FY2017]

Principle 1: Policy on fulfilling stewardship responsibilities
・In addition to past measures, we enhanced the equity research structure for long-term investment through measures such as recruiting personnel for the Corporate Research Group and its Stewardship Enhancement Section.
・We signed the “Principles for Financial Action towards a Sustainable Society (Principles for Financial Action in the 21st Century).”
※Just as in 2017, in the 2018 evaluation report on the “United Nations-supported Principles for Responsible Investment (PRI),” SMAM received the highest grade of “A+” in the overall evaluation (strategy and governance) and was highly evaluated for initiatives for fulfilling stewardship responsibilities.

Principle 2: Policy on managing conflicts of interest to fulfill stewardship responsibilities
・We received recommendations each quarter from the Independent Third-party Committee aimed at checking overall fiduciary duty, such as conflict of interest relationships, and published the details in May and October.
・In terms of exercising voting rights, starting from shareholder general meetings in June 2017, we exercised voting rights for all resolutions of all owned companies according to guidelines to appropriately handle conflicts of interest, and began to disclose the results of the exercise of voting rights individually.

Principle 3: Policy on understanding a company's situation
・In FY2017, analysts of the Corporate Research Group had approximately 5,300 contacts with companies (approx. 5,600 in FY2016), of which approximately 3,500 (approx. 3,700 in FY2016) were individual meetings and approximately 910 (approx. 900 in FY2016) were individual information gathering sessions with board members and managing executives.
・In the individual meetings, engagement was performed under the themes of overall business strategies such as investment strategies, capital policies, and shareholder return, as well as the exercise of voting rights and ESG.
・The Engagement Management Group has been working together with Corporate Research Group analysts to perform engagement with targeted companies and repeatedly made proposals for improving corporate value.

Principle 4: Policy on engagement
・We have repeatedly conducted engagement based on the theme of business strategies linked to increasing ROE. As an example, we have explained the importance of proactive management of ROE as a target variable for balance sheet control, etc., and companies have responded favorably.
・Regarding ESG, we discussed while providing examples of other companies the inclusion of ESG in management and active disclosure of ESG information to increase the sustainability of management.
・We started collective engagement by working together with other institutional investors to conduct dialog with companies.

Principle 5: Policy on exercise of voting rights, disclosure of voting results
・In terms of the exercise of voting rights, we also exercised voting rights in accordance with the guidelines for all resolutions of owned companies in FY2017 (at shareholder general meetings from July 2017 - June 2018), and the proportion of opposition to company resolutions was 33.9% (36.9% in the previous year). For details, please refer to “Results of the Exercise of Proxy Voting Rights.”
・In the published SMAM Guidelineson the Exercise of Proxy Voting Rights, which we have formulated to minimize arbitrariness in voting as much as possible, we have established standards with aims such as bringing about appropriate corporate governance and increasing corporate value and the level of ROE. In particular, for ROE that is inferior to the global standard, if ROE is lower than the shareholders’ cost of capital and the listed company average (top 50%) for three consecutive years, SMAM will in principle oppose resolutions for the election of directors who have held office for three years or more (at the June 2018 shareholder general meeting, a standard of 7% was set as equivalent to the average ROE for FY2017).
・We continue to be strongly committed to improving corporate value through the exercise of proxy voting rights and active dialog with investee companies.
※At the Independent Third-party Committee meeting held in July 2017, concerning the exercise of proxy voting rights in FY2016, the committee proposed that “If proxy voting rights were to be exercised for shareholder companies as well strictly in accordance with the Guidelines on the Exercise of Proxy Voting Rights, there would no problems from a perspective of appropriate response to conflicts of interest.” However, it also recommended that “Although the Guidelines on the Exercise of Proxy Voting Rights can be considered to fulfill the Stewardship Code, it may be necessary to explain the reasons for and concepts behind the quantitative standards. In particular, regarding the reasons to use only ROE, it would be good to supplement the existing text so that it can be understood by managers who are looking in many cases at different profit rates.”
Based on these recommendations, we strengthened our explanations concerning our reasons for using ROE and its background in our discussions with companies.

Principle 6: Policy on reporting the status of initiatives regarding stewardship responsibilities
・In addition to reporting on stewardship activities in a timely fashion when requested by discretionary investment management contract customers, we have published the engagement activities performance for April 2017 to March 2018 for beneficiaries on our website. Refer to “Engagement Activity Results: April 2017 - March 2018”

Principle 7: Policy on maintaining and developing SMAM's capabilities to fulfill stewardship responsibilities
・We enhanced the structure and recruited personnel for the Corporate Research Group and its Stewardship Enhancement Section.
・We have continued to discuss and increase awareness of engagement with external investment institutions as strategic partners.
・The Proxy Voting Sub-Committee met 25 times, and the Engagement Group met 6 times with the aim of improving stewardship activities through the review of past activities and the discovery and investigation of issues.

[Future Policies]

・We will continue to promote increasing corporate value through the exercise of voting rights and active dialog with investee companies with the aim of delivering investment results.
・We will position ESG evaluation as the foundation for company analysis from the medium to long-term perspective, and actively implement initiatives for analysis of non-financial elements. Furthermore, we will actively focus on the application of ESG investments.
・We will utilize the recommendations of the Independent Third-party Committee while appropriately managing conflicts of interest to protect the interests of our customers and their beneficiaries.

Please refer to our Fiduciary Action Plans for specific company-wide measures including stewardship activities.