mfs stewardship report...this report provides a quarterly update of our esg integration and...

FOR INSTITUTIONAL AND INVESTMENT PROFESSIONAL USE ONLY

MFS® Stewardship Report


Second Quarter 2020

2FOR INSTITUTIONAL AND INVESTMENT PROFESSIONAL USE ONLY

Table of Contents

1 Sustainable investing at MFS

4 ESG integration update

5 Stewardship at MFS

6 Proxy voting activity

7 Representative

engagement activity


Sustainable Investing at MFS

MFS has been actively managing our clients’ money since we created the first open-end mutual

fund in 1924. Deep fundamental research and a long-term perspective are the foundation of

our investment approach. We seek to achieve our clients’ long-term economic objectives by

responsibly allocating their capital.

As an active manager, we have always sought to identify investments that can add sustainable,

long-term value for our clients. In 2009, we formed the MFS Responsible Investing Committee

and issued the MFS Policy on Responsible Investing and Engagement to ensure the systematic

integration of financially material environmental, social and governance (ESG) topics into our

investment process.

Over the past decade, we have made significant progress toward achieving our ESG integration

goals. We have added resources dedicated to integrating sustainable investing into every aspect of

our investment process and developed a comprehensive sustainable investing framework.

This includes enhancing our efforts on effective stewardship, which we define as our fiduciary duty

to allocate capital responsibly, engage productively with companies and other industry participants

and exercise our voting responsibility thoughtfully and deliberately.

This report provides a quarterly update of our ESG integration and stewardship activity that we

hope offers our clients insights into our sustainable investing approach and how we allocate their

capital responsibly.

For a more comprehensive overview of sustainable investing at MFS, please visit mfs.com/

sustainability, where you will find our Sustainable Investing Annual Report, our responsible

investing and proxy voting policies, which govern our stewardship activities, and a wide variety of

sustainable investing research and thought leadership.

We recognize that sustainable investing is an important topic for our clients, and we welcome any

opportunity to discuss it further with you.


At MFS, it is our firm belief that a successful approach to sustainable investing requires the

participation of our entire firm. Sustainable investing describes our fundamental investment

process; it is not a separate discipline with different inputs or outcomes. As such, our sustainable

investment process requires that all of our investment professionals are actively engaged in, and

responsible for, its success.

In order to facilitate the adoption, implementation and enhancement of sustainable investing

practices across the firm, we employ a number of individuals positioned to provide strategic

leadership on sustainable investing and support effective integration of sustainability topics across

teams and disciplines.

Investments

Barnaby Wiener, one of our most seasoned portfolio managers, serves as Head of Sustainability

and Stewardship. A leader and culture carrier who has long been a champion of sustainability,

Barnaby works closely with our three ESG-dedicated research analysts to engage with investment

leadership, portfolio managers and analysts to ensure that all of our investors truly understand and

have ownership of sustainability in their research and portfolio management duties. He also plays a

strategic role with regard to issuer engagement on sustainability topics.

Our investment team includes two equity analysts and one fixed income analyst dedicated solely to

ESG research who have done much to advance our investment team’s thinking on ESG topics. Our

ESG analysts fulfill a critical role in facilitating our sustainable investing efforts. However, they are

not intended to be the source of all ESG research. Their role is to support and enhance the ongoing

research into ESG topics performed by our portfolio managers and analysts.

Pooja Daftary

Investment Team

Mahesh Jayakumar Barnaby Wiener

Lindsey Apple

Proxy Voting

Herald Nikollara Margaret Therrien

Rob Wilson

Michael Cantara

Client Facing

Mason Gregory Dan Popielarski Vishal Hindocha

DEDICATED SUSTAINABLE INVESTING PROFESSIONALS


Proxy voting

The administration of the MFS Proxy Policies is overseen by the MFS Proxy Voting Committee. Our

team of three dedicated proxy analysts manages day-to-day proxy voting and engagement activity.

The proxy voting team employs a collaborative approach in its decision-making, incorporating

information and perspectives from our global team of investment professionals, from public

disclosures and engagement discussions with our portfolio companies, and from a variety of third-

party research tools. This process facilitates well-rounded viewpoints on key issues, which we

believe leads to well-informed voting decisions that are in the best long-term economic interests of

our clients.

Client engagement and thought leadership

We have personnel dedicated to developing thought leadership and engaging with our clients and

the investment industry on ESG issues. These individuals play an important role given the high level

of interest from industry participants in understanding how asset managers such as MFS approach

sustainable investing.

Michael Cantara, who leads our global client group, plays an important role in the advancement of

sustainable investing within the firm and how we communicate our approach externally. Mike is co-

chair of the MFS Sustainability Group and the MFS Responsible Investing Committee.

The MFS Investment Solutions Group, which leads the development of thought leadership, client

research and special projects for MFS, includes three individuals fully dedicated to sustainable

investing. This team develops ESG thought leadership and market research as well as interacting

with our clients in the capacity of investment strategists.


ESG Integration Update Second Quarter 2020

Sustainability strategy

Our approach to sustainable investing remained consistent during the second quarter of 2020.

There were no substantial changes to our overarching ESG integration, proxy voting or engagement

processes; however, MFS continued to make internal and external ESG research and data more

available. During the quarter, our entire global investment team was authorized to receive access to a

new environmental data set, which will aid in our ongoing analysis of climate change and related risks.

Research activities

During the quarter, our investment team continued to produce a substantial amount of company-

specific, sectoral and thematic ESG research, which was shared across our entire global research

platform.

Company-specific: One of our North American telecom analysts upgraded a company to a buy

rating based partially on its strong customer service and ability to reach both minority groups and

lower-income consumers. Other research performed by the team included analyses related to human

rights abuses at a UK business services company and supply chain risk at a US apparel/footwear

manufacturer, among many other examples. In addition to supporting the broader team’s work,

our ESG research analysts continued to contribute to our security-level research, offering detailed

perspectives throughout the quarter regarding companies in the blood plasma, European medical

device, and global mining industries.

Sectoral: Our global consumer cyclicals sector team developed a presentation and hosted a discussion

on income inequality and risks related to low wage labor in the sector. This meeting resulted in several

engagements with company management teams regarding the sustainability of low wages and the

corporate cultural signals provided by companies that offer higher wages and better benefits. Similarly,

our financials sector team held a meeting to discuss how various companies are positioned to respond

to rising societal expectations around fair wages.

Thematic: Our investment team spent a considerable amount of time during the quarter evaluating

emerging climate risks and opportunities associated with coal gasification and hydrogen. We have

engaged with the management teams of multiple companies in the industrial gas industry on these

topics. Our work in this area has influenced how many of our portfolio managers assess the relative

value of industrial gas companies.

During the quarter, our entire global investment team was authorized to receive access to a new environmental data set, which will aid in our ongoing analysis of climate change and related risks.


Stewardship at MFS

Consistent with our ESG integration practices, we believe open communication with companies

and issuers is an important aspect of our ownership responsibilities. Our goal when engaging is to

exchange views on ESG topics that, in our view, represent material financial risks or opportunities

for companies or issuers and to effect positive change on such issues. We believe that large, long-

term-oriented asset managers who engage companies and issuers on ESG topics can positively

influence governance and business practices by encouraging executive teams to view these issues

as relevant to an increasingly broad investor base and worthy of further consideration.

We typically engage with companies and issuers on ESG issues in four ways:

Informal investment team–led engagement — Our investment team engages with

companies on a consistent basis, often sharing ideas and asking ESG-related questions of

management teams during meetings in our offices. We view these meetings as “informal”

engagement opportunities, as the discussion is not always focused on driving corporate

change, but rather it is often about better understanding the risk/return profile of the

company’s securities.

Formal investment team–led engagement — Each year, our investment team requests

ESG-focused meetings or writes formal letters with the aim of engaging with various

companies’ boards on ESG topics.

Collective and other forms of engagement — We often engage with sponsors of

shareholder initiatives or proposals, which helps inform our views on important proxy voting

issues, and we participate in various industry working groups and organizations that seek

to develop thought leadership on emerging proxy voting issues. MFS may send letters to

regulatory agencies in order to encourage corporate governance reform when we feel it is

warranted.

Formal proxy voting–led engagement — Representatives of our Proxy Voting Committee

engage in a dialogue with a company or other stakeholders when we believe that the

discussion will enhance our understanding of certain matters on the company’s proxy

statement

For more detailed information, or to view our Sustainable Investing Annual Report and our

responsible investing and proxy voting policies, please visit mfs.com/sustainability.

Our goal when engaging is to exchange views on ESG topics that, in our view, represent material financial risks or opportunities for companies or issuers and to effect positive change on such issues.

1.

2.

3.

4.

INFORMAL

INVESTMENT-LED

FORMAL

INVESTMENT-LEDCOLLECTIVE

FORMAL

PROXY-LED

MFS ENGAGEMENT ACTIVITIES


*Represents percentage of total votes. At 41% of meetings during the quarter, MFS voted against management at least once.

During the second quarter, our proxy voting team continued to focus on engagement as

we entered the 2020 proxy season. In-season engagement discussions with management,

directors and other senior representatives of portfolio companies typically focus on particular

ballot items submitted for a shareholder vote and help inform our analysis of such issues.

Discussions led by our proxy team during the 2020 proxy season focused on topics such as

n Corporate culture

n Board gender diversity

n Alignment of executive pay and company performance

n Climate change

n Director qualifications

n Board independence

MARKETS

54MEETINGS

1,344PROPOSALS

16,796VOTES AGAINST MANAGEMENT

7.1%*

PROXY VOTING STATISTICS

Proxy Voting Activity


REPRESENTATIVE ENGAGEMENT ACTIVITY

Retailers in Focus

Developed market income inequality is being driven by structural factors

(e.g., automation, outsourcing/globalization, etc.) that are unlikely to naturally reverse

based on market forces. We believe these structural factors will cause society to put

more emphasis on addressing inequality through regulation, which could reverse many

of the margin-enhancing steps companies have taken to reduce labor costs.

For example, the value of service sector jobs has diminished substantially. Few of these

jobs offer a living wage, health and retirement benefits or consistent schedules, which

has forced society to pick up the cost of the negative externalities associated with these

types of employment practices. Research suggests that layoffs substantially hinder the

job performance of remaining employees, the cost of replacing an employee is up to two

times his or her salary, and new employees can take two years to get to full productivity.

Given this, we should be willing to look through the short-term pain of margin

degradation and select companies that invest in their employees and can outperform

over the long term by avoiding these pitfalls.

These could be companies that already manage their workforce well (i.e., those that have

avoided relying too much on the labor cost reduction levers described above) or those

that have sufficient margins or sustainable pricing power to absorb increased labor

costs. Such increased employee costs are also likely to become stickier during

downturns, further impacting decreasing margins in future recessions.

The things we consider include

n extra COVID-related compensation per employee

n total COVID related costs (including extra cleaning) as percentage of revenues

n analyzing Glassdoor ratings

n employee turnover rates

n mix of contract and temporary employees

n offshoring mix

n employee turnover

With many retailers being deemed “essential” during the pandemic, our investment

team has engaged extensively with companies to discuss how they are managing

corporate culture, employees and layoffs during this crisis and beyond. This is especially

important given an increasing societal emphasis on inequality and its materiality.


Domicile: United Kingdom

Sector: Communication services

Industry: Diversified telecommunication services

Date: June 2020

Participants: Covering industry analysts, portfolio managers,

ESG analyst

Meeting type: Conference call

Several members of our investment team had a call with

Helios Towers, an African cell tower operator, on

sustainability topics. Helios has a substantial opportunity

to benefit from ESG-related tailwinds. Helios enables

better connectivity for the local population, improved

service reliability, lowered telecom costs (savings ideally

passed through to consumers as competition intensifies)

and has reduced its fuel consumption as it consolidates

mobile network operators within fewer sites. The business

also faces significant ESG risks, most notably bribery and

corruption. Fortunately, the company has had strong

practices in this area. Management has also designed a

corporate culture that addresses these risks.

During the call, we pressed the company’s team, as we

have many times in the past, about its use of diesel to

power its cell towers. We would like it to continue to find

innovative ways to power its sites more sustainably.

The company is working to improve in this area: it has

many sites using solar and hybrid forms of energy. The

company generally tries to connect its sites to the electric

grid, but in many of the regions where the company

operates, it is not always possible. Overall, our discussion

was positive and the Helios team reinforced our view that

while there is plenty of room for improvement, the

company continues to make progress on enhancing the

sustainability of its operations.

Helios Towers PLC (HTWS LN)

Owns and operates telecommunications towers and passive infrastructure in five high-growth African markets


Domicile: United States

Sector: Consumer discretionary

Industry: Internet and direct marketing retail

Date: May 2020

Participants: Proxy team, covering industry analyst


Members of our proxy voting and investment teams

engaged with senior representatives of Amazon.com, Inc.

to discuss shareholder proposals on the ballot at the

company’s 2020 annual shareholder meeting. Our

discussion focused on issues relating to food waste

management, supply chain standards, hate speech and

human rights concerns around surveillance and facial

recognition software. Although we were satisfied with

Amazon’s current practices and disclosures in some

respects, we felt it was in shareholders’ best interest to

support several proposals advocating for additional

progress. While none of the twelve shareholder proposals

on the ballot received majority support, six of the seven

proposals supported by MFS received support from more

than 30% of shareholders, demonstrating a significant

level of shareholder interest in these issues.

Amazon.com, Inc. (AMZN US)

Global retailer and cloud computing provider

PERCENTAGE OF SHAREHOLDER PROPOSALS ON THIS BALLOT THAT MFS SUPPORTED

58%



Sector: Information technology

Industry: Software

Date: April 2020

Participants: Proxy team, portfolio manager


Members of our proxy voting and investment teams

engaged with the board chair and other senior

representatives of Ansys Inc. to discuss executive

compensation, board composition, evolving ESG efforts

and strategic priorities. Our discussion around

compensation focused on a one-off retention grant paid

to the CEO and other executives. As we review one-off

grants cautiously and look for awards that incentivize

sustainable, long-term behavior, we were eager to discuss

the design of the award and the strategic reasoning

behind it. Our discussion around board matters largely

centered on outside director service, as well as data

security as a critical focus of the board and, in particular, of

the board chair and the audit committee.

Ansys Inc. (ANSS US)

Develops and markets engineering simulation software and services worldwide



Sector: Financials

Industry: Capital markets

Date: April 2020

Participants: Proxy team, covering industry analyst


Members of our proxy voting and investment teams spoke

with senior representatives of Goldman Sachs Group,

including the chair of the compensation committee and

the lead director, ahead of the 2020 annual shareholder

meeting to discuss board composition, compensation,

sustainability and corporate culture. With regard to board

composition, we discussed the company’s approach to

director recruitment and succession planning, including

areas for growth in its director skills matrix and its focus on

building and maintaining a diverse board. In particular, we

observed a notable increase in female representation on

the board, from 15% in 2016 to 36% in 2020. Our

discussion on compensation centered on the board’s new

performance assessment framework, which serves to

align executives’ incentives with the long-term strategic

goals of the firm. The framework also provides

shareholders with additional transparency and board

accountability, which will aid in assessing the structure

and rigor of the program.

Goldman Sachs Group Inc. (GS US)

Operates as an investment banking, securities, and investment management company worldwide

WE OBSERVED A NOTABLE INCREASE IN FEMALE REPRESENTATION ON THE BOARD, FROM 15% IN 2016 TO 36% IN 2020

15%

36%

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In 1924, MFS launched the fi rst US open-end mutual fund, opening the door to the markets for millions of everyday investors. Today, as a full-service global investment manager serving fi nancial advisors, intermediaries and institutional clients, MFS still serves a single purpose: to create long-term value for clients by allocating capital responsibly. That takes our powerful investment approach combining collective expertise, thoughtful risk management and long-term discipline. Supported by our culture of shared values and collaboration, our teams of diverse thinkers actively debate ideas and assess material risks to uncover what we believe are the best investment opportunities in the market.

The views expressed in this presentation are those of the speaker and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any other MFS investment product.

The Global Industry Classification Standard (GICS®) was developed by and/or is the exclusive property of MSCI, Inc. and S&P Global Market Intelligence Inc. (“S&P Global Market Intelligence”). GICS is a service mark of MSCI and S&P Global Market Intelligence and has been licensed for use by MFS.

Unless otherwise indicated, logos and product and service names are trademarks of MFS® and its affiliates and may be registered in certain countries.

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