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RESPONSIBLE INVESTM ENT

INTRODUCTION

This document describes our approach to responsible investment encompassing:

Investor stewardship

Environmental, social and governance (ESG) considerations

Our voting principles

Integrating ESG into fund selection

Collaborations and affiliations

Controversial weapons policy

Our response to the Stewardship Code

Details of our voting and engagement record are published on our website at www.quiltercheviot.com

For further information please contact: Gemma WoodwardDirector of Responsible Investment e: [email protected] t: 020 7150 4320

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RESPONSIBLE INVESTMENT AT QUILTER CHEVIOT


As a responsible investor Quilter Cheviot is committed to its role as a steward of clients’ assets in order to protect and enhance long-term returns. This encompasses our engagement with investee companies, through proxy voting and face to face dialogue, as well as taking into account environmental, social and governance (ESG) factors which could impact shareholder returns.

Investor Stewardship

Quilter Cheviot aims to meet the challenges of a dynamic market environment to deliver the investment performance that provides its clients with the outcomes they require to meet their financial aspirations

In our capacity as an investment manager we act as steward for our clients’ assets. Company shares usually carry voting rights and exercising these enables shareholders to express their view and engage with companies to support the creation of wealth, benefitting shareholders and the wider economy

As a responsible investor we will use voting rights (where appropriate) in order to further the economic interests of our clients and we have established a set of voting principles which guide how we vote

Discretionary clients’ holdings held in our nominee name will be voted in accordance with Quilter Cheviot’s decision, as the voting of holdings is a reflection of our investment thesis

Should a conflict of interest arise which may influence us to not act fairly, independently or objectively in the interests of our clients, we will follow the voting recommendations of our third party proxy voting service provider

In addition to voting we express our views and protect our clients’ interests through direct dialogue with company management. Our central teams of equity and fund analysts provide a dedicated investment research resource with no conflicting commitments; along with investment managers the research team monitors investee companies on an ongoing basis and regularly meet company management

We recognise the UK Stewardship Code as best practice, which aims to enhance engagement between investors and companies

Our conflict of interest policy may be found on our website www.quiltercheviot.com

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RESPONSIBLE INVESTMENT AT QUILTER CHEVIOTRESPONSIBLE INVESTMENT AT QUILTER CHEVIOT


Environmental, social and governance (ESG) considerations

We recognise that in some circumstances ESG issues may impact a company’s ability to pursue its business strategy and affect its financial performance. We therefore expect investee companies to identify and manage ESG risks and opportunities to the extent they affect their business strategy. ESG issues may be broad and varied, but examples might include:

A growing number of companies manage ESG issues as part of their business as usual model in order to mitigate risk and maximise opportunity. Embracing ESG strategies may have both direct and indirect positive impacts on the financial performance of a company.

• Direct impacts may be seen from the efficient use of material and energy resources, productivity improvements and process changes which can lead to reduced costs

• Indirect gains are more difficult to measure, but are nonetheless important. These may include brand and reputational benefits of community engagement, which may in turn attract potential clients and employees and also encourage increased employee and client loyalty

Integrating ESG considerations into our investment process helps us identify and understand potential risks and opportunities and ultimately protect, and possibly enhance, long term investment outcomes for our clients. When we meet company management we discuss a number of issues, and as appropriate, those relating to ESG issues.

Natural resource scarcity

Waste and pollution

Environmental regulation

Labour relations

Human rights

Employee diversity

Health and safety

Corruption and bribery

Business ethics

Corporate governance

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OUR VOTING PRINCIPLES

Introduction

Our priority is to vote our UK equity and investment trust monitored lists as this represents a significant proportion of our assets under management; and we will normally participate in all votes for these stocks from early 2017.

We will consider voting outside of the centrally monitored universe if a material issue arises, however we will not vote

if doing so prevents us from trading (i.e. in jurisdictions where stock-blocking takes place) or the costs are

prohibitive. We may consider expanding our voting activity beyond this universe in future. We use a third party voting service provider to facilitate this process and will produce

a summary of voting activity on a quarterly basis.


OUR VOTING PRINCIPLES

Introduction

Our priority is to vote our core UK equity and investment trust holdings as this represents a significant proportion of our assets under management. We will consider voting outside of the centrally monitored universe if a material issue arises, however we will not vote if doing so prevents us from trading (i.e. in jurisdictions where stock-blocking takes place) or the costs are prohibitive.

Initially we focussed our voting on the UK 50 equity and investment trust monitored lists; the components of these lists evolve over time. In order to ensure that we act on a consistent basis we do not remove a holding from the voting universe just because it is no longer on the list. The rationale being that 1) when we engage with companies we do so for the long-term and 2) the holding often continues to represent a significant proportion of our clients’ assets under management.

We may consider expanding our voting activity beyond this universe in future. We use a third party voting service provider to facilitate this process and produce a summary of voting activity on a quarterly basis.

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Voting principles

In determining our voting principles we use ISS’ policy for the UK and Ireland. This is broadly consistent with that of the Pension & Lifetime Savings Association (PLSA) as well as good practice within the market.

Voting decisions are a reflection of our investment thesis, and we have dedicated equity and fund research teams who meet with the companies we invest in on a regular basis; as well as monitoring them on an on-going basis. We will use the following principles to guide how we vote, although we may deviate from this on occasion, for example where there are non-standard arrangements within a company we will consider the efficacy of these before making a decision.

The most recent version of the UK Corporate Governance Code (the Code) was released in July 2018. Companies will have to report in line with this on a comply or explain basis, for accounting periods starting 1 January 2019; however the Code’s provisions relating to remuneration policies and significant shareholder votes against, will be applied in 2019.

We welcome the new provisions regarding shareholder dissent. In future, where a company has received 20% or more votes against a board recommended resolution it should:

• As part of the voting results announcement provide details of how it intends to engage with shareholders to understand the rationale behind the dissent

• Provide a final summary in the annual report on what impact the engagement with shareholders has had on the board’s decision making

• If applicable, explanatory notes should be included with the resolutions at the next shareholder meeting

From September 2018 the London Stock Exchange amended the rules for companies listed on the AIM market so that they are now required to apply a recognised corporate governance code and explain how this is implemented.

Equities and investment trusts

We have two teams of analysts: one which focuses on equities, and the other, collective vehicles. A significant proportion of our equity holdings are UK listed companies and therefore our voting is concentrated on our core monitored list of UK equities and investment trusts. However we may vote outside this universe where we have a material interest on behalf of our clients in a company, or there is a specific issue we wish to vote on, as voting is part of our investment thesis.

The following provides a guide to how we typically vote in relation to specific topics.

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The board

The board is collectively responsible for the long-term success of the company. The board has to have sufficient independence as Non-Executive Directors (NEDs) should constructively challenge management and no one individual should have unfettered powers of decision making. In order to ensure that the composition of the board is appropriate there are a number of factors that we assess including:

Independence of the board

• The appointment of a former CEO as Chairman would be contentious, unless there was a reasoned rationale for this, likewise for the roles of Chairman and CEO not being separated

• The ratio of independent to non-independent NEDs and the composition of different committees (this will vary depending on whether the company is in the FTSE 350 or not)

Effectiveness of the board

• The information we receive ahead of the election of a new director; we expect this to be both timely and detailed regarding their experience and skills

• The number of roles and other commitments that a NED may have, in order to ensure that all NEDs have sufficient time to devote to the board

• When there is a contested election of directors we will make the assessment based on whether we believe change is necessary, and if so, whether we believe the dissident board nominees are likely catalysts for positive change

We will also take into consideration the Financial Reporting Council’s consultation regarding the Code which recommends that NEDs (including chairmen) should have a maximum tenure of nine years.

Remuneration

Executive pay should be aligned to the long-term strategy of the company and returns to shareholders; with performance targets that are challenging but realistic. Therefore moving the goal posts in terms of the re-testing of performance conditions or the re-pricing of share options is not something we would usually support.

Increases in executive remuneration should be in line with those across the wider employee base; and we would expect that executives hold shares equivalent to a minimum of 200% of their base salary. Remuneration has become increasingly complicated; ultimately the decision as to whether to support the remuneration policy is linked to whether we believe the executives are adding value for shareholders over the long-term. To determine this we will consider a number of factors including:

• Whether the approach to fixed remuneration is appropriate and the performance criteria for all elements of variable pay are clearly in line with the company’s strategic aims; additionally the award levels for the variable pay components are capped

• That there are clear explanations for maximum awards being given for the LTIP (Long-Term Incentive Plan) and annual bonus

• The LTIP terms include change of control, good leaver and malus / clawback provisions

• Contractual entitlements are reasonable and do not provide excessive payments in the event of termination

• Shares granted or other types of long-term incentives should be subject to a vesting and holding period of at least five years

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Auditor

The role and the appointment of the auditor are central to good corporate governance. The auditor must maintain independence; therefore the length of tenure and the ratio of audit to non-audit fees are issues which must be addressed clearly. Where they are not (and adequate explanation is not given) then we will consider voting against the chairman of the audit committee and/or voting against the auditor’s remuneration.

Concerns regarding the auditor’s procedures or a sudden (and unexplained) change in auditors will usually lead to us voting against the appointment of the auditor. Where there are concerns about the accounts or audit procedures, an accounting fraud, or a material misstatement in the year we will consider whether to approve the financial statements and statutory reports.

Where the tenure of the auditor exceeds ten years and there has not been a recent tender process, nor are there plans for this, then we will consider voting against the audit committee chair.

Capital structure

Changes to the capital structure may well impact shareholders’ long-term interests if not considered carefully. Therefore whilst we are generally supportive of companies managing their capital effectively, consideration will be given to the following factors:

• New issuance: we are supportive of companies issuing new capital so long as it is not detrimental to existing shareholders, therefore we would expect the general issuance authority to not exceed one third of the issued share capital, or two thirds for a fully pre-emptive rights issue. For investment companies we support the AIC guidance (October 2017) regarding the issuance of new shares

• Pre-emption rights: when new shares are issued usually existing shareholders are given the opportunity to take these up (pre-emption rights), in order to avoid the dilution of existing shareholdings. Companies have the right to dis-apply these pre-emption rights, but we would expect this to be limited to 5% of the ordinary share capital in any one year

• Share buybacks: we will support share buybacks as long as they do not exceed more than 15% of issued ordinary share capital in any one year, and that the authority to do so is put before shareholders on a regular (usually annual) basis

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Other issues

When considering other resolutions, we will evaluate what is in the best interest of shareholders and assess these issues on a company by company basis. Other resolutions may relate to a number of topics, including:

• Environmental and social issues

• A proposed change to the Articles of Association

• The pay-out ratio of dividends

• Mergers and acquisitions

• Related party transactions

• Reincorporation proposals

• Authority to call a general meeting with two weeks’ notice

• Political donations and expenditure in the EU

• Takeover bids (we will usually vote against mandatory takeover bid waivers)

Smaller companies

Long-term shareholder returns remain our determinant in how we vote; however there are two key differences in the approach we take to smaller companies:

• We will generally support a smaller company to have the right to dis-apply pre-emption rights and the routine authority to do so should be limited to 10% of the ordinary share capital in any one year

• The ratio of independent to non-independent members on different committees

Investment trusts

The governance structure of an investment trust is slightly different to that of a listed company and as such the Association of Investment Companies’ Code has adapted the UK Corporate Governance Code; these differences are reflected in our voting principles. Interaction with the board and our knowledge of the investment trust takes precedence; therefore this is again a principle based approach.

We support the AIC Code recommendations that the performance and contractual arrangements are reviewed annually by directors independent of the manager; and additionally that the board of an investment company is fully independent of the firm providing fund management services. We will generally support continuation votes, however where a special meeting is called owing to discount mechanisms being triggered we will review this on a company specific basis.

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INTEGRATING ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) FACTORS INTO FUND SELECTION

As a responsible investor Quilter Cheviot is committed to its role as a steward of clients’ assets in order to protect and enhance long-term returns. This encompasses our engagement with third-party funds through face to face dialogue. Our focus is to understand how the fund manager’s philosophy, process and consideration of risks, may impact fund returns.

Responsible investment

Voting and engaging with companies and funds we invest in on environmental, social

and governance matters

Quilter Cheviot is one of the largest fund buyers in the UK market (as at December 2019 we held £15.2 billion of client assets in third-party funds). We have a specialist fund research capability responsible for monitoring over 300 closed and open-ended funds. Funds are selected in accordance with Quilter Cheviot’s investment strategy, involving both quantitative and qualitative analysis, with significant importance placed on meeting the individual fund managers and their teams.

When we invest via a third-party fund, one of our considerations is how the manager incorporates ESG into their investment process. For us, taking into account environmental, social and governance issues is about ensuring all potential risks to an investment are considered. We are keen to understand how considering these ESG factors fits into the manager’s investment process, alongside all the other metrics they might use to assess investments. The label of ESG may be an anathema to some; and therefore understanding the manager’s process and philosophy is a key component within this.

In our discussions with managers we want to evaluate how they are incorporating key ESG issues into their analysis of companies; at worst not considering ESG factors might lead to reputational and financial damage for companies that are not managing these issues effectively. These are examples we may look for:

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Environmental Social Governance

Remuneration: balancing pay with results

Board challenge: composition, diversity, succession planning, time

Share issuance: positive or detrimental

Human rights: managing global operations

Cyber security: understanding and managing the risks

Business ethics: pay, policies, tax

Safety & quality standards

Water & energy: usage / efficiency / scarcity ‘stranded assets’

New legislation regarding the use and disposal of plastic

Safety & quality standards

How does the manager approach these factors?

These are risks that can lead to reputational and financial damage

However, we are mindful of:

• The asset class(es) the manager is investing in

• The strategy that the manager is implementing

• Adoption of global and local codes or principles

• Quality over quantity

The asset class(es) the manager is investing in

Different asset classes present different ESG considerations; below we have outlined some of these:


Equities Environmental and social factors affecting companies Ability to use voting rights and engage with the board

Fixed incomeThis is in its infancy - however a growing number of fixed

income investors are putting in place policies on how they seek to integrate these issues into credit analysis

Rarely have voting rights for bonds – consideration more

around credit rating and board engagement

Property (direct)

Environmental and social factors affecting property holdingsIncorporation of ESG issues into ownership policies and practices including measurement of

sustainability performance of assets

InfrastructureEnvironmental and social factors affecting assets

Incorporation of ESG issues into ownership policies and practices including measurement of sustainability performance of assets

Absolute return Depends on the asset class and strategy

Private equity Environmental and social factors affecting investee companies Approach depends on whether fund of funds or direct

Governance structure of investee companies

Incorporation of ESG issues into ownership policies and

practices

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The strategy that the manager is implementing

As an example for equity managers there are different strategies that may be implemented. Depending on the strategy that the manager has adopted we would expect certain ESG considerations:


Index - trackers Not applicable – unless applying a ‘smart beta’ ESG screen Ability to use voting rights

and engage with the board

Quant Not typically applicable Are the shares held long enough to vote?

Discretionary Degrees of integration – managers may consider these factors without using the ESG label Voting and engagement

Fundamental stock selection

Can consider Environmental and Social risks as part of processAbility to engage Voting and engagement

Sustainable Looking for positive impactsAbility to engage Voting and engagement

EthicalExclusions as well as potentially incorporating positive

screeningAbility to engage

Voting and engagement

Adoption of global and local codes or principles

For managers operating in the UK we would expect them to be signatories to the UK Stewardship Code which for institutional managers is under a ‘comply or explain’ regime. The Financial Reporting Council which is responsible for this assesses managers as either being Tier 1 or Tier 2. A Tier 2 manager is deemed to have met many of the reporting expectations but is not transparent enough about its stewardship approach or does not provide explanations where it departs from provisions of the Code. For Tier 2 managers, our focus is on whether they are working to achieve Tier 1 status.

Managers may sign up to the United Nations’ Principles for Responsible Investment (UNPRI) or align their strategy to the United Nations’ Sustainable Development Goals (UNSDGs). We welcome such moves; however will be sceptical where there is little concrete evidence of how they implement these.

Quality over quantity

As well as encouraging managers to explain how they approach ESG integration, in line with best practice we expect managers to regularly publish details of their voting and engagement. In terms of the latter we look for quality not quantity; voting on thousands of resolutions at AGMs may be laudable but we are more interested in the thought process that goes into making these decisions. Often this quantum of voting may simply be the result of an automated voting system which does not lead to engagement with companies on key topics.

Fund research reporting

ESG integration is part of our fund research process; our fund research is entirely proprietary therefore we will not usually report publicly on manager specific matters. We publish quarterly our voting and engagement record; within this we will include details of engagement with external managers if appropriate. This will usually be an anonymised basis.

We have a track record of engaging with managers and particularly the closed-end fund industry. Examples of this, at an industry level, would include the 2017 consultation with the Association of Investment Companies on the disapplication of pre-emption rights and the subsequent letter we sent to investment company brokers regarding this as well as our thoughts on communication, fees and board composition.

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Collaboration and affiliations

As part of the Quilter plc, Quilter Cheviot is a signatory of the United Nations’ Principles for Responsible Investment which is a global, investor-led, initiative to promote and support the integration of ESG considerations into investment research and ownership practices.

We are also members either through Quilter plc, or in our own right of several formal or informal groups which may facilitate collaboration with other investors, including:

The UK Investment Association

Investor Group of the 30% Club

UKSIF (The UK Sustainable Investment and Finance Association)

COLLABORATIONS AND AFFILIATIONS

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2 An “anti-personnel mine” is a landmine which is designed to be detonated by the presence, proximity or contact of an individual and is capable of incapacitating, injuring or killing an individual.

3 “Cluster munition” means a conventional munition that is designed to disperse or release explosive sub-munitions each weighing less than 20 kilograms. “Prohibited munition” means a cluster munition, or an explosive bomblet that is specifically designed to be dispersed or released from dispensers affixed to aircraft (“a relevant explosive bomblet”).

4 The policy covers long and short positions in companies that manufacture develop or trade in core weapon systems which are components/services that are tailor-made and essential for the lethal use of the weapon, e.g. warhead, propulsion system. The policy does not apply to supporting systems or technical/administrative support that whilst essential are not tailor-made for the core weapon system. In the event of exposure via a parent/subsidiary company relationship we apply a 20% ownership threshold.

5 Given the nature of funds that track or replicate indices, policies relating to controversial weapons are not generally applicable to them.

Controversial weapons policy

This statement sets out Quilter Cheviot’s position with respect to investments in companies involved in the manufacture, development or trade of controversial weapons, specifically anti-personnel mines2 and cluster munitions3. These weapons are subject to international and national law and are of concern due to their humanitarian consequences and the unacceptable harm caused to civilians through their use.

Legal context

The Anti-Personnel Landmines Convention 1997 bans the use, stockpiling, production and transfer of anti-personnel mines and prohibits assisting others in these prohibited acts. Over 160 countries, including the UK, have signed the Convention. This treaty has been implemented in the UK through the Landmines Act 1998.

The Convention on Cluster Munitions 2008 bans the use, production, stockpiling and transfer of cluster munitions. It became legally binding on 1 August 2010, and at the time of writing 94 countries, including the UK, were signatories. Countries that have signed the Convention undertake “never under any circumstances to assist, encourage or induce anyone to engage in any activity prohibited”. This treaty has been implemented in the UK via the Cluster Munitions (Prohibitions) Act 2010.

Quilter Cheviot’s position

Quilter Cheviot will not knowingly invest directly in securities (equity or debt) of listed companies involved in the manufacture, development or trade of anti-personnel mines or cluster munitions or components or services of the core weapon system which are considered tailor-made and essential for the lethal use of such weapons4. This policy applies to portfolios directly managed by Quilter Cheviot where we have discretion over security selection. Information regarding companies’ involvement in anti-personnel mines or cluster munitions is provided by an independent third party provider. This policy does not apply to collectives managed by third party fund managers; however we do encourage them to articulate their policy with respect to controversial weapons5.

CONTROVERSIAL WEAPONS POLICY

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THE STEWARDSHIP CODE

Our response to the Stewardship Code

As a responsible investor Quilter Cheviot is committed to its role as a steward of clients’ assets in order to protect and enhance long-term returns.

Stewardship activities include monitoring and engaging with companies on matters such as strategy, performance, risk, capital structure, and corporate governance, including culture and remuneration. Engagement is purposeful dialogue with companies on those matters as well as on issues that are the immediate subject of votes at general meetings.

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6 The Financial Conduct Authority requires any firm authorised to manage funds, which is not a venture capital firm, and which manages investments for professional clients that are not natural persons, to disclose “the nature of its commitment” to the Code or “where it does not commit to the Code, its alternative investment strategy” (under Conduct of Business Rule 2.2.31). The Financial Reporting Council (FRC) states in the Preface to the Code that it is addressed in the first instance to firms who manage assets on behalf of institutional shareholders such as pension funds, insurance companies, investment trusts and other collective investment vehicles.

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We recognise the UK Stewardship Code (“the Code”) as best practice. It aims to enhance the quality of engagement between investors and companies to help improve long-term risk-adjusted returns to shareholders. The Code is overseen by the Financial Reporting Council (FRC) and complements the UK Corporate Governance Code for UK listed companies.

The Code6 is directed primarily at institutional investors, by which is meant asset owners and asset managers with equity holdings in UK listed companies. Institutional investors may choose to outsource to external service providers some of the activities associated with stewardship.

At Quilter Cheviot the significant majority of our clients are classified as retail customers. However we believe that stewardship is important, no matter what the category of client and therefore our response to the Stewardship Code aims to outline clearly how we conduct our stewardship activities.

Below we set out how Quilter Cheviot adheres to the seven principles of the UK Stewardship Code.

Stewardship policy

Stewardship Code Principle

Investors should publicly disclose their policy on how they will discharge their stewardship responsibilities

The aim of our stewardship activity is to protect our clients’ interests and the value of their investments. Company shares usually carry voting rights and exercising these enables shareholders to express their view and engage with companies to support the creation of wealth; benefitting shareholders and the wider economy. As a responsible investor we will use voting rights (where appropriate) in order to further the economic interests of our clients and we have established a set of voting principles to guide our voting decisions. Our Responsible Investment document details our ethos as well as our voting principles and may be found on our website at www.quiltercheviot.com. Investment styles

As at 31 December 2019, Quilter Cheviot managed over £24.2 billion on behalf of over 40,000 private clients, charities, trusts and small pension funds. On behalf of our clients, we invest in direct bonds and equities, as well as collective vehicles such as open and closed ended funds. Clients choose between investment management either on a discretionary or non-discretionary basis. We apply our stewardship approach to discretionary holdings, and this is focussed on our core UK equity and investment trust holdings.

We use the services of ISS (a proxy voting service provider) and use its recommendations as a basis for our engagement and voting. We apply our own views to the policy and therefore will not always follow the recommendations if we feel it is appropriate to take a different course of action.

A significant proportion of the assets we invest in on behalf of our clients are funds managed by third parties. Where these funds invest in UK equities, we expect asset managers to adhere to the UK Stewardship Code and we expect them to apply their own voting and engagement policies to the funds they are managing on our behalf. It is important for asset management firms to retain stewardship powers so they are able to align stewardship and voting with the investment style and process for which they are responsible. Due diligence is undertaken on these asset management firms by our multi-asset and fund research teams, including their approach to stewardship and responsible investment.

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Core investment universe

Our client base is a mix of private client portfolios, small pension funds, trusts and charities. Given the nature of our client base we have a long tail of small holdings which represent legacy and cherished positions. It would be impractical to vote all our equity and investment trust positions and therefore we have chosen to focus on our largest and most widely held positions where we can have most influence. Given the nature of our predominantly UK client base, these are UK listed equities and investment trusts. Where clients wish to vote their stock we will do so on a reasonable endeavours basis.

Exercising stewardship takes a variety of forms and the size of holdings affects the most appropriate method. At its simplest, this may be exercising proxy votes for companies in which we invest. However, where we have material positions held over a longer time horizon, stewardship may extend to fostering a relationship with companies that allow engagement, debate, and constructive challenge and, if necessary, encouraging change at the company. We focus this in-depth stewardship activity where we have material shareholdings, and as such greatest influence. The specific thresholds around which we make voting and engagement decisions will vary according to the percentage of share capital we control, the particular issue under consideration and the size of the company. We take the view that where our percentage share capital of a company is small, the materiality of that holding to the company and therefore the persuasive effect of our holding will be limited. However at the same time, we are mindful that whilst we may represent a very small proportion of a large FTSE 100 company’s shareholder base, in terms of our in-house holding this may well represent one of our clients’ largest holdings in GBP sterling; therefore it remains incumbent on us to exercise our stewardship as effectively as we are able in these circumstances.

Conflicts of interest


Investors should have a robust policy on managing conflicts of interest in relation to stewardship which should be publicly disclosed

Quilter Cheviot’s conflicts of interest policy may be found at www.quiltercheviot.com.

It is possible that actual or perceived conflicts of interest may arise in relation to the execution of our stewardship activity. Should a conflict of interest arise which may influence us to not act fairly, independently or objectively in the interests of our clients we will follow the voting recommendations of our third party proxy voting service provider.

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Examples of possible conflicts include:

• There may be a situation where we are a shareholder in a company and also in a commercial relationship with that same company as a result of investing in one of their funds. As we have a separation (and distinct, different reporting lines, as illustrated below) between our equity and our fund research teams, which are also both independent functions; we believe that we are able to manage this conflict effectively given this separation

• Quilter Cheviot is part of Quilter plc. There may be occasions where an interest to be voted is held in Quilter plc. In these cases, unless specifically directed by a client, we will follow the guidance given by our external proxy voting service provider with respect to voting

• Conflicts could occur between clients and where this is the case we will continue to act in the best interests of each client. Thus, for example, the equity share interests of different clients may be voted differently at the same meeting where it is in the interests of each to do so

• Where an employee of Quilter Cheviot, or any member of senior management or non-executive director within the wider business is a non-executive director of a company within our voting universe we will apply the guidance of our external proxy voting service provider

Monitoring and escalation


Investors should monitor their investee companies

It is a core part of our work to monitor investments and our central teams of equity and fund analysts provide a dedicated investment research resource with no conflicting commitments. Alongside investment managers, the research teams monitor investee companies on an on-going basis and regularly meet company management.

Chief investment strategist Co-director of investments (multi-asset)

Head of equity research & equity research team

Head of fund research & fund research team

Example:

Quilter Cheviot is a significant shareholder in a FTSE 350 company; at the time of the AGM, one of the NEDs on the company’s board was employed by Quilter Cheviot as a consultant.

At the 2016 AGM there was a recommendation by our third party proxy voting service provider (ISS) to vote against management on two resolutions. Given the potential conflict of interest we followed ISS’ recommendations and engaged with the company to explain the issues and what changes we would like to see.

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THE STEWARDSHIP CODE

Monitoring

Our monitoring includes, but is not limited to:

An ongoing assessment of a company’s financial and operational performance

The quality and credibility of strategy

The markets and economies in which companies operate

The effectiveness of a company’s leadership

The financial sustainability

The quality of a company’s reporting and governance processes, including environmental and social issues (particularly those that are or may be material to the value of the company)

The ethical behaviour of the company and membership of its leadership team. (This includes an expectation that companies will move swiftly to achieve and exceed the aspirations set out by the UK 30% Club.)

We also consider compliance with the UK Corporate Governance Code and where companies do not comply with the Code, we will consider asking for an explanation for the non-compliance based merits and circumstances of each case. Areas of particular interest include company strategy, continuing operational success, executive pay and, increasingly, the steps a company is taking regarding environmental management and the impact of climate change.

The information published by companies, particularly financial statements and reports & accounts are important sources of information to assist in monitoring investments, but we also use other sources including third party environmental, social and governance research, financial research and information we obtain during the course of engagement with a company. The desired outcome of monitoring activity is to reduce risk and/or obtain greater long-term success for the company and therefore our clients. Thus, achieving change and avoiding risks are factors we take into account in reviewing holdings and the success of our activity. ‘Over the wall’

In the course of our monitoring and engagement with company management, specific members of staff may become insiders ‘over the wall’ (OTW). If a member of staff is OTW then they are prohibited from trading/dealing in the relevant security (or related securities); encouraging others to deal in the security (or related securities); or disclosing the information to anyone else.


Investors establish clear guidelines on when and how they will escalate their stewardship activities

Stewardship is overseen by Quilter Cheviot’s Director of Responsible Investment, who works closely with analysts and investment managers on issues of stewardship. Regular engagement with companies arises from one-to-one, and group meetings with company executives often following company results announcements. These meetings permit analysts and investment managers to assess the valuation of companies but are also used to question companies on strategy, governance, performance and financial management.

Depending on the topics of discussion, meetings are also held with company chairs, and chairs of remuneration committees; in specific instances we will request a meeting with the Senior Independent Director (SID) if we believe this will be helpful.

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Engagement

Where possible it is our preference to support the management of companies in which we have holdings. We will therefore evaluate the actions and strategies of companies constructively, particularly through meetings and other engagement with executive and non-executive directors of the board. However, where there is a threat to the value of the company, we will take steps to protect the value of our clients’ investments. We may consider taking one or more of the following actions:

Examples of recent discussions with engagement:

• Discussions with companies ahead of the publication of a new remuneration policy - in some cases urging for changes to the provisions

• New share issuance which may have been detrimental to existing shareholders

• Joining with other members of the 30% Club to meet a company to discuss board composition

• Meeting with remuneration consultants to discuss trends and specific issues that concern us

• Following engagement with a company agreeing to support management in the expectation of certain actions being taken in the future

If we do not sell a holding, but remain concerned regarding some aspect of governance, strategy or operations, and we are unable to reach an understanding with a company, we may vote against particular, related resolutions at a shareholder meeting and may continue to do so in future years if an issue remains unresolved. We understand that there is merit in asset managers providing greater transparency in their communications with companies. However, it may not be in the interests of progressing discussion with a company; and at times, the nature of the conversation may be confidential.

Engaging with members of the company board

Discussing or working with other shareholders on matters of mutual interest

Voting contrary to the management proposals at general meetings

Selling the holding where we evaluate it is in the interests of our clients to do so

In extreme circumstances, we could requisition a general meeting

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Shareholders working collectively


Institutional investors should be willing to act collectively with other investors where appropriate

Working collaboratively with other investors can increase the level of influence over companies and it may therefore be desirable to encourage them to address shareholder concerns. The decision to work collaboratively is taken on a case by case basis but in all such conversations, care is required to avoid inadvertently creating concert parties or inadvertently providing inside information. We are members either through Quilter plc, or in our own right, of several formal or informal groups which may facilitate collaboration with other investors, including:

• The UK Investment Association

• Investor Group of the 30% Club

• UN Principles for Responsible Investment

• UKSIF (The UK Sustainable Investment and Finance Association)

Contact regarding collaborative engagement from other investors should be made to the Director of Responsible Investment at [email protected]

Transparency and disclosure


Institutional investors should have a clear policy on voting and disclosure of voting activity

Our voting principles take into account the following:

• UK Corporate Governance Code

• Association of Investment Companies’ (AIC) Code

• Pension & Lifetime Savings Association (PLSA)

• Corporate Governance Policy and Voting Guidelines

• PLSA Corporate Governance Policy and Voting Guidelines for smaller companies

We have separate teams of analysts who research equities and funds. A significant proportion of our equity holdings are UK listed companies and therefore our voting is concentrated on our core monitored list of UK equities and investment trusts.

However, we may vote outside this universe where we have a material interest on behalf of our clients in a company, or there is a specific issue we wish to vote on. We will consider voting outside of the centrally monitored universe if a material issue arises, however we will not vote if doing so prevents us from trading (i.e. in jurisdictions where stock-blocking takes place) or the costs are prohibitive. We may consider expanding our voting activity beyond this universe in future. When a client instructs us to vote in a specific way we will do our best to accommodate this, but we will not include this within our activity reporting as this is not reflective of our voting principles. Where we vote against or abstain on a resolution we will advise the company formally that we have done so. We do not stock lend. We publish our voting principles, and our voting activity reports online at www.quiltercheviot.com.

When implementing our voting principles, we will, on occasion, following engagement with the company, determine that it is appropriate to support resolutions that might be contrary to the outline policy we have adopted.

An example of this would be a company in which we are a significant shareholder, where ahead of its first AGM the chair of the remuneration committee met with us to outline the potentially contentious policy and report. We agreed to support management with the expectation that improvements in disclosure will be made over time and that our views had been taken into consideration for the future reporting.

The resolutions on which we vote against or abstain may be seen in the record of our voting at company general meetings.

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Institutional investors should report periodically on their stewardship and voting activities

When voting we are mindful that we must act in the best interests of all our clients, and are committed to being open and transparent with respect to our stewardship activity, therefore we produce a quarterly summary of our responsible investment activity. The reports are in a standard format, available to both clients and public, detailing how we voted each resolution and include explanatory notes where we have voted against management proposals. Past and present voting and stewardship reports can be found on our website www.quiltercheviot.com.

We will use our discretion when disclosing our voting and engagement activity, and in some cases may choose not to name the company or the fund in question if we believe publicity is likely to prove counterproductive. Undertaking potentially sensitive engagement in public may lead to a defensive reaction and entrench views of company management. Therefore we often prefer confidential, constructive dialogue which enables a trust based relationship, permitting clear and occasionally frank communication and challenge. Assurance

The Stewardship Code states that companies signing up to the Code should obtain an independent opinion on their engagement and voting processes. This is undertaken through a combination of independent external assurance, compliance monitoring and Internal Audit assurance following a risk based-approach.

This statement is reviewed annually and updated as necessary.

In 2019 an external audit was undertaken by Deloitte & Touche LLP.

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RESPONSIBLE INVESTMENT

We use the services of ISS (a proxy voting service provider) and use its recommendations as a basis for our engagement and voting. We apply our own views to the policy and therefore will not always follow the recommendations if we feel it is appropriate to take a different course of action. Over the year we voted at 171 company meetings.

For further information on our voting and engagement, visit: https://www.quiltercheviot.com/

uk/private-client/responsible-investment-and-esg-integration/

As part of Quilter plc, Quilter Cheviot is a signatory of the Principles for Responsible Investment which is a global, investor-led, initiative to promote and support the integration of ESG considerations into investment research and ownership practices.

We are also members either through Quilter plc, or in our own right of several formal or informal groups which may facilitate collaboration with other investors, including:

• The UK Investment Association

• Investor Group of the 30% Club

• UKSIF (The UK Sustainable Investment and Finance Association)

171COMPANYMEETINGS

Over 2019 we voted at:

VOTE

(1 votes against)

VOTE

ANNUAL VOTING STATISTICS

171COMPANYMEETINGS

Over 2019 we voted at:

It is important to note that on a number of occasions having engaged with the relevant company we did not follow ISS’ recommendations.

vote against a remuneration report

vote against election of an NED

vote against remuneration policy

vote against investment policy

vote against the wind up of a property company

vote against activist investor joining the board

abstention of re-election of an NED

vote against share issuance

(6 votes against)

VOTE

(1 votes against)

VOTE

(1 votes against)

VOTE

(1 votes against)

VOTE

(1 abstention votes)

VOTE

(1 votes against)

VOTE

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VOTING AND ENGAGEMENT - QUARTER 4, 2019

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QCB036 (08/2020)

https://www.quiltercheviot.com/uk/private-client/responsible-investment-and-esg-integration/

https://www.quiltercheviot.com/uk/private-client/responsible-investment-and-esg-integration/

quiltercheviot.com

Investors should remember that the value of investments, and the income from them, can go down as well as up. Investors may not recover what they invest.

Past performance is no guarantee of future results.

Quilter Cheviot Limited is registered in England with number 01923571, registered office at One Kingsway, London, WC2B 6AN,

England. Quilter Cheviot Limited is a member of the London Stock Exchange; is authorised and regulated by the UK Financial

Conduct Authority; has established a branch in Jersey and is regulated under the Financial Services (Jersey) Law 1998 by the

Jersey Financial Services Commission for the conduct of investment business in Jersey and by the Guernsey Financial Services

Commission under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 to carry on investment business in the Bailiwick of

Guernsey. Accordingly, in some respects the regulatory system that applies will be different from that of the United Kingdom.

os009272 qc responsible investment brochure[2]...t: 020 7150 4320 2 responsible investment at...

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