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CCLA INVESTMENT MANAGEMENT LIMITED PSDF(17)P07 The Public Sector Deposit Fund Advisory Board Noting * For Public Sector Deposit Fund Counterparty ESG Check 2016 Context: CCLA’s Ethical and Responsible Investment Team monitor existing and potential CBF and COIF Deposit Fund and PSDF Money Market Fund counterparties’ management of environmental, social, and governance (ESG) risk on an annual basis. Further action is taken when appropriate. Two potential counterparties, OCBC and Landesbank Berlin, remain restricted for all Deposit and Money Market funds managed by CCLA. 2016 ESG Analysis: There have been no changes to the methodology used by CCLA for the review. However, an update of MSCI Governance Metrics methodology, to incorporate an additional 20 home markets in their analysis of corporate governance standards, has impacted upon the scoring. This amendment has served to stabilise the MSCI Rating and bring it more into line with our own house views on best practice corporate governance. It follows a significant period of discussion with MSCI. Due to supplier data coverage different methodologies have been adopted for listed and unlisted counterparties as follows. Methodology - Listed Counterparties: Level 1 (score 0 to 3, weighting 60%); CCLA's in house ESG integration criteria, as based upon data provided by FTSE ESG and MSCI Governance Metrics. This includes counterparties' approach to supply chain management, environmental management, climate change risk, corporate governance factors and accounting risk. Level 2 (score 0 to 3, weighting 30%); Corporate governance factors that are considered to be the most material. This includes: the separation of the roles of CEO/Chairman, the independence of the audit committee, and the bank's approach to avoiding bribery and corruption. It acts as a supplement to the corporate governance factors included within Level 1. Level 3 (score 0 to 3, weighting 10%); social and environmental factors based upon CCLA client priorities. This includes each counterparties' approach to, providing finance to communities and SMEs, controlling environmental risk within lending, the living 1 wage (UK only, as based upon the engagement prioritised by the Ethical Fund Advisory Committee) and the UN Global Compact1. As in previous years each counterparty's approach has been scored on a scale of 0 to 3 for each factor. All scores are then weighted (with more material issues in level 1 given a high weighting and less material in level 3 a low weighting). The final 'Total Score' represents the percentage achieved of the maximum possible score. Counterparties were then ranked in accordance with their standard deviation scores (SD) as follows: Red: between 2 and 3 SDs below mean; Amber: Between 1 and 2 SDs below mean; Yellow: Less than one SD below mean; Light blue: Less than one SD above mean; Light Green: Between 1 and 2 SDs above mean; Green: 2 or more SDs above mean. Methodology - Unlisted Counterparties: Given the lack of supplier data for unlisted counterparties the number of criteria included within level one analysis has been expanded. This now includes key factors considered within MSCI’s Ratings and FTSE's methodologies including: counterparties' environmental policy, approach to countering bribery, the separation of the roles of CEO/Chairman, the composition of key board committees, and assessing compliance against local market corporate governance norms. Level two criteria include many of the client priorities included within level three of the listed counterparty analysis, as discussed above. Given the size of the sample, it is not possible to perform a meaningful statistical analysis. Therefore a simple ranking exercise has been undertaken. 2016 Score Overview: There has been a general uplift in the scores for all listed entities and no listed entity has a score of more than two standard deviations below the sample mean. Five listed entities score between one and two standard deviations below the mean. Of these two were identified for engagement in the previous review (JPMorgan Chase and HSBC Holdings). 2016 Engagement outcomes and recommendations: 1 The UN Global Compact is a strategic policy initiative for businesses that are committed to aligning their operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption. By doing so, business, as a primary driver of globalization, can help ensure that markets, commerce, technology and finance advance in ways that benefit economies and societies everywhere. 2 Three companies were identified in 2014 and 2015 for full engagement. JP Morgan Chase Bank: We are approaching the end of the two year engagement cycle. The company has responded positively to engagement with a conference call held on the 22nd November. During the call the company were open to appointing a genuinely ‘independent’ Lead Director, once the current incumbent retires from the board. He is 77 and offers his resignation on an annual basis. Whilst we should not expect this instantly there is an obvious refreshment cycle on the board. Op-Pohjola Group: We began a two year engagement cycle with the company in order to improve its score and better understand the revisions to its governance structure. The company has responded positively to engagement and provided additional policy documents. These set out the company’s governance arrangement, which are similar to those found in co-operatives. Given its unusual structure we should continue to monitor the company. Landesbank Berlin: The Company has not responded to engagement. Given their approach to ESG factors, should they return to the UK market, we would suggest that they continue to be considered an ineligible counterparty subject to further engagement. Five companies were identified for ‘light touch’ engagement in 2015. Commerzbank: Responded positively to engagement and provided additional information with respect to their process and procedures. The company are striving for inclusion in the 2017 FTSE4Good Index (this requires consistently high FTSE ESG Ratings across 14 ESG themes). HSBC: The Company has responded well to engagement. A meeting was held with the Company Secretary and covered HSBC’s plans to appoint an independent chairman and continue the ongoing process of board refreshment. The meeting also discussed the remit of the Culture and Values Committee, the Banking Standards Board Assessment process and the visibility into non-UK subsidiaries. Deutsche Bank: responded to engagement which is ongoing. Engagement focused on the steps the Company has taken to 3 understand shareholder concerns (as expressed in the level of dissent votes) with respect to the discharge of directors. In response to shareholder requests, Deutsche Bank has commissioned an independent external audit by BDO of its risk management systems. This is due to be published around the time of the 2017 Annual Meeting. CitiBank: did not respond to engagement but improved their score in the 2016 analysis. Bank of New York Mellon: The Company responded positively to engagement the focus has been Board and Committee Structure. After a number of years with limited refreshment the board has begun a succession planning process for all non-executives with the aim of increasing the proportion of directors with between four and nine years’ experience, thus reducing risks associated with long standing directors retiring having reached retirement age. A similar process is also being applied to committee membership. Since the start of the engagement process an independent Lead Director has been appointed. 2017 Engagement: Due to the uplift in scores no existing counterparties have been identified for full engagement. We would propose light touch engagement with: Sumitomo Mitsui Financial Group, HSBC Holdings, BNP Paribas, United Overseas Bank, and JP Morgan Chase. In addition, we should continue our conversations with Deutsche Bank following the publication of the Independent Auditors Report. Actions: The Board is are invited to note the 2016 ESG counterparty analysis, engagement progress and the 2017 engagement priorities. 4 Appendix 1: 2016 Environment, Social and Governance Check PSDF Listed Counterparties Level 1 NATIONAL AUSTRALIA BANK LTD 60.00 AUSTRALIA AND NEW ZEALAND BANKING GROUP 60.00 SWEDBANK AB 55.00 DNB ASA 55.00 ING GROEP NV 52.50 COMMONWEALTH BANK OF AUSTRALIA 52.50 SOCIETE GENERALE SA 53.33 NORDEA BANK AB 50.00 DBS Bank Ltd 40.00 BANQUE DE MONTREAL 45.00 BARCLAYS PLC 50.00 NATIONAL BANK OF CANADA 40.00 WESTPAC BANKING CORP 42.50 DANSKE BANK A/S 40.00 UBS GROUP AG 37.50 CIBC London 40.00 Mizuho Bank 42.50 SANTANDER UK 40.00 CREDIT AGRICOLE CIB 37.50 Bank of Scotland 37.50 LLOYDS BANKING GROUP PLC 37.50 SVENSKA HANDELSBANKEN A 40.00 ROYAL BANK OF CANADA 40.00 BANK OF NEW YORK MELLON CORP 40.00 Bank of Tokyo Mitsubishi UFJ 37.50 STANDARD CHARTERED PLC 32.50 TORONTO-DOMINION BANK 35.00 SKANDINAVISKA ENSKILDA BANKEN AB 32.50 BANK OF NOVA SCOTIA 32.50 BANK OF AMERICA CORP 35.00 DEUTSCHE BANK 35.00 CITIBANK 30.00 Sumitomo Mitsui Banking Corporation Europe 32.50 HSBC HOLDINGS PLC 32.50 BNP PARIBAS SA 32.50 UNITED OVERSEAS BANK 20.00 JPMORGAN CHASE & CO. 33.33 ABN AMRO LONDON 32.50 Level 2 28.29 24.64 27.21 26.14 27.21 26.14 24.64 20.79 30.00 24.64 19.29 28.93 25.29 27.21 28.93 25.07 23.57 24.00 25.07 24.64 24.64 20.79 20.36 18.64 20.36 24.64 22.07 24.00 23.57 20.36 20.36 24.64 21.86 20.36 19.29 30.00 16.07 12.86 Level 3 1.00 0.78 0.67 0.78 0.89 1.00 0.89 0.78 0.33 0.67 0.67 0.11 1.00 0.56 0.67 0.67 0.44 1.00 0.89 0.67 0.67 0.56 0.56 0.00 0.56 1.00 0.56 0.89 1.00 0.67 0.67 0.89 0.67 0.89 0.89 0.00 0.56 0.89 Total Score 89.29 85.42 82.88 81.92 80.60 79.64 78.87 71.56 70.33 70.31 69.95 69.04 68.79 67.77 67.10 65.74 66.52 65.00 63.46 62.81 62.81 61.34 60.91 58.64 58.41 58.14 57.63 57.39 57.07 56.02 56.02 55.53 55.02 53.75 52.67 50.00 49.96 46.25 Source data provided by FTSE, MSCI, GMI Ratings ISS publically available information and information received through company engagement - correct as of 31st Dec 2016 5 Appendix 2: 2016 Environment, Social and Governance Check PSDF Un-Listed Counterparties Nationwide Rabobank Leeds BS Coventry Building Society Bayerische Landesbank Bank Nederlandse Gemeeten Zürcher Kantonalbank Landesbank Baden-Wuerttemberg Credit Industriel et Commercial (CIC) Deutsche Zentral-Genossenschaftsbank Op-Pohjola Group Landesbank Hessen-Thueringen Girozentrale Landesbank Berlin AG Level 1 90.00 90.00 77.14 68.57 68.57 55.71 55.71 55.71 55.71 47.14 42.86 34.29 8.57 Level 2 5.00 5.00 0.00 3.33 3.33 2.78 2.78 2.78 2.78 2.78 3.33 3.33 1.67 Total 95.00 95.00 77.14 71.90 71.90 58.49 58.49 58.49 58.49 49.92 46.19 37.62 10.24 6