ESG Annual Report highlighting Rockefeller Asset Management’s ESG investing activities in 2018 and our priorities for 2019.

A Note from Our Chief Investment Officer

I am pleased to present to you our third annual Environment, Social and Governance (ESG) report highlighting our ESG investing activities in 2018 and our priorities for 2019. In the midst of challenging global markets in 2018, we saw continued improvements across companies along various ESG factors. Our ESG research has served us well in refining our fundamental financial analysis of companies in our portfolios during a time of heightened volatility. Our team’s conviction in investment decisions was deepened through proactive ESG engagement with 100% of our portfolio holdings.

Consistent with the Rockefeller Family heritage, Rockefeller Capital Management (“Rockefeller”) believes that ESG factors can be used to identify potential investment risks and opportunities. We view active stewardship, including engagement with management, to be an essential part of our obligation as shareholders. That engagement seeks to ensure that the companies in which we invest embrace business practices that are consistent with long-term value creation and sustainable growth.

We are proud of our history in ESG investing and continue to push forward with new initiatives as active owners. In 2018, we:

• Joined the Sustainability Accounting Standards Board (SASB) Alliance
• Co-Authored the Principles for a Responsible Civilian Firearms Industry with a coalition of investors representing nearly $5 trillion of combined assets
• Became a signatory of the Sustainable Blue Economy Finance Principles
• Joined the United Nations Environment Programme Finance Initiative’s (UNEP FI) pilot project, as the only U.S. investor of 20 investors, to develop metrics and guidelines for investor disclosures in alignment with the recommendations of the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD)

We appreciate your interest in ESG investing and look forward to our continued partnership with you.

Sincerely,

David P. Harris, CFA
Chief Investment Officer & President of Rockefeller Asset Management
Rockefeller Capital Management

SUMMARY OF OUR ENGAGEMENTS

Corporate engagement is fundamental to our research methodology and to the impact of our flagship Global ESG Strategy. Rockefeller’s legacy and collaborative approach affords us the ability to engage with management teams, investor relations, operational managers and corporate social responsibility teams across our companies; in fact, we strive to engage with 100% of the Global ESG Portfolio holdings irrespective of geography.

Our intent for these engagements is not only to enhance our investment insight, but also to effect positive change globally.

Although the UN Sustainable Development Goals (SDGs) are increasingly becoming a recognized framework, the issues that they address have been well-represented historically across our ESG strategies. Although we began engaging companies on these topics years before these goals were developed, we are now using the framework to shape our engagements and quantify the positive impact.

As these goals strive to achieve a more sustainable world overall, we have incorporated these topics within every engagement this year, within our portfolio companies and beyond. These discussions are not limited strictly to our ESG portfolio companies, as the over arching goals should positively impact every individual, company, and nation.

It is important to note, however, that the SDGs are not all encompassing, and were not designed specifically for the private sector or asset managers. They do not capture many of the issues that we incorporate into our ESG investment decisions or in our engagements with our portfolio companies. Thus, we still follow our Four Pillar approach (Governance, Products & Services, Human Capital Management, and Environment) and in fact, integrate the SDGs throughout our framework.

We also recognize that the extent and specifics of our engagements cannot always be portrayed in a quantitative fashion and our impact is often anecdotal and specific in nature. Thus, we have expanded on some of the topics and engagements that we have placed significant emphasis on this year.

ENGAGEMENT AREAS OF FOCUS

INCREASED TRANSPARENCY.

As we look back on the year, we are encouraged by some of the progress made through engagements with our holdings. We learned that in some markets, companies still do not understand the relevance of ESG risk disclosure. We engaged with ZoZo inc., a Japanese e-commerce company on supply chain management, and with Shenzhou International Group, a Chinese integrated apparel manufacturer on human capital management. A visit to ZoZo’s offices in Japan presented an opportunity to open a dialog with the company on the importance of assessing ESG risks in its supply chain and offer suggestions for adding disclosure to its website. In a subsequent engagement, ZoZo committed to auditing its new manufacturing facility in China. Conversations with Shenzhou yielded additional layers of supply chain and human capital management disclosure as well as an invitation to tour its manufacturing site in Vietnam.

DRUG PRICING.

In 2017, we began exploring valuebased concepts that will begin transitioning the healthcare industry by incorporating increased levels of accountability through outcomes-based care and compensation. This past year we engaged with multiple biopharmaceutical companies such as Regeneron and Spark Therapeutics on the issue of value-based drug pricing in accordance with clinical and economic benefits and discussed our thoughts in a Rockefeller insights paper titled The Future of Drug Pricing. We believe future biopharmaceutical leaders will embrace a value-based paradigm that can enhance drug pricing transparency and improve a marred industry reputation for exploiting an implicit social contract. We intend to continue engaging our portfolio companies on incorporating value-based pricing attributes and suggest best practices that we believe will have a positive impact on the company’s bottom line as well as their customers.

CYBER SECURITY.

Data privacy and cyber security were a focal point of our 2018 corporate engagements with both BigTech companies and the banking sector. Material to the business models of both sectors, we identified data privacy and security as new areas of risk management, needing enhanced oversight. Operating under stricter regulations and a stronger culture of compliance, big banks in the United States, UK and Europe (JPMorgan Chase, ABN AMRO, ING Groep, Lloyds Banking Group) have adopted strong governance models and board oversight of operational cyber resiliency and the protection of customer data. Many banks have opted to elevate the position of a Chief Digital Officer to the senior management level and have invested heavily in Artificial Intelligence (AI) and machine learning to accelerate the digitalization of services and customer engagement. 2018 was a turning point for BigTech and how it handles data privacy, content monitoring and user security. Compelled by Facebook’s Cambridge Analytica scandal and under the regulatory pressure of the EU GDPR, tech companies made efforts to upgrade their digital privacy policies, increase transparency over dealings with advertisers and third-party vendors, and enhance users’ control over sharing of personal data. Tech companies in the United States and China (Facebook, Alphabet and Tencent) are investing in AI and human capital in an effort to better deal with the challenges of content monitoring and compliance with community standards on their internet and online social services. As innovative businesses, BigTech are lagging other sectors in shareholder engagement and accountability for their business practices and lack of corporate sustainability.

WORKPLACE CULTURE, DIVERSITY AND ANTIDISCRIMINATION.

Although we continue to engage with our holdings in the ESG strategy on diversity among employees, managers and the board, 2018 also shed light on the systemic nature of harassment and discrimination in the workplace. We know that harassment and discrimination can contribute to hostile work cultures, which can impact employee retention, recruiting, and cause a general lack of productivity. As no industry, sector or company is entirely immune to these issues, we looked into a variety of best-practice examples so as to help our portfolio companies address these issues, both reactively as well as proactively. Some of these engagements, such as with Ford Motor Company, were especially helpful as we were able to provide some meaningful suggestions, which the company implemented (see case study on page 10 for more details).

CLIMATE CHANGE.

Rockefeller Asset Management is proud to be a signatory to the “We Are Still In” campaign, a declaration by 2,826 leaders across all 50 states, representing 171.7 million people and $6.4 trillion in GDP that U.S. stakeholders are still committed to the Paris Agreement targets. To show our commitment to this campaign, we discuss climate change issues with nearly every company in our Global ESG Strategy. We have come to the conclusion that there is no government, industry, or individual that will not be affected in some way by the changing climate. For this reason, our climate engagements are focused specifically on opportunities within each company’s business model, as well as the physical and transition risks the company faces. This year we have discussed: more Research & Development spending on lower-embedded carbon products with our materials holdings such as HeidelbergCement, Cemex and Saint-Gobain; the risks of certain oil and gas infrastructure financing with banks such as JP Morgan and ING; the need to align internal policies with proclimate lobbying with the Ford Motor Company – and most importantly: reducing scope 1 emissions while considering pathways to shifting business models away from fossil fuels with energy holdings EOG Resources, ConocoPhillips and Total SA.

BLUE ECONOMY.

2018 saw a number of initiatives that codified a worldwide acknowledgement that ocean ecosystems face increasing threats from habitat destruction and plastic pollution to overfishing and ocean acidification. In tandem with this realization, we have witnessed the growing recognition of the importance of global partnership and engagement initiatives such as the Sustainable Blue Economy Finance Principles, the Seafood Business for Ocean Stewardship (SeaBOS) and the PRI plastics working group that will further influence and enhance sustainable growth and contribute to better ocean governance.

Sustainable Blue Economy Finance Principles – In 2018, Rockefeller Asset Management became a signatory to the 14 voluntary principles that will provide guidance for investment decisions that will enable and promote implementation and achievement of SDG 14 (life below water).

Seafood Business for Ocean Stewardship (SeaBOS) – In 2018, Rockefeller Asset Management decided to join the engagement initiative of exploring whether or not a small number of “keystone actors” have the potential to transform the global seafood system.

PRI Plastics Working Group – Rockefeller Asset Management joined the plastics working group in 2018 as we believe that a committee of influential asset managers and asset owners can raise investor’s awareness and understanding of the impacts, risks and opportunities related to plastics.

ENGAGEMENT CASE STUDIES

ZOZO

A JAPANESE E-COMMERCE RETAILER
REASON FOR ENGAGEMENT: Proactive engagement following initial ESG due diligence

ENGAGEMENT ACTIVITY
Our initial engagement began with a call with Investor Relations where we requested disclosure of their supply chain management – including their audit process. We followed up with a questionnaire for clarification on the same issues and provided examples of best in class disclosure. An ESG analyst met with ZOZO management in March 2018 reiterating the importance of ESG materiality, resulting in the management team realizing the importance of disclosure. In a subsequent call, ZOZO committed to auditing their new manufacturing facility.

OUTCOME
Over the course of these discussions, the company has implemented the following changes:

1. Disclosed ESG information on their website, where they previously had none
2. Committed to audit parts of their manufacturing supply chain, including a new Chinese manufacturing facility

FORD MOTOR COMPANY

AN AUTOMOTIVE PRODUCER IN THE USA REASON FOR ENGAGEMENT: Reactive engagement following controversy

ENGAGEMENT ACTIVITY
Following the NY Times expose last December, which shed light on the systemic sexual harassment and gender-based discrimination that was occurring at two of Ford’s production plants outside of Chicago, we addressed the issue on group calls, as well as one-on-one dialogues with Ford’s Director of Personnel Relations and Employment, Head of CSR, and investor relations. In these conversations we provided tangible suggestions on how Ford could address the issue and how the company should work to revamp its culture into one that is inclusive and safe for every worker.

OUTCOME
Over the course of these discussions, the company has implemented the following changes:

1. Independent monitoring and auditing of the factory floor
2. Frequent interactive, scenario based trainings, including bystander training
3. Increased checks and balances between HR and Personnel Relations
4. More coordination with the union
5. A stated commitment to centering victims in all thoughts and actions as incidents arise
6. Independent 3rd party vendor to manage the harassment hotline
7. Increased the presence of women on plant operating committees
8. The appointment of a “culture manager” on the firm operating committee to increase efforts across the firm
9. Removal of binding arbitration clauses in employment agreements
10. A stated commitment to pay equity, with 3rd party verification
11. Adoption of a zero tolerance policy that is victim-centered
12. More reporting channels that are independently reported to various levels of management, culminating at the Board level.

FORD MOTOR COMPANY

AN AUTOMOTIVE PRODUCER IN THE USA REASON FOR ENGAGEMENT: Reactive engagement following controversy

ENGAGEMENT ACTIVITY
Following the NY Times expose last December, which shed light on the systemic sexual harassment and gender-based discrimination that was occurring at two of Ford’s production plants outside of Chicago, we addressed the issue on group calls, as well as one-on-one dialogues with Ford’s Director of Personnel Relations and Employment, Head of CSR, and investor relations. In these conversations we provided tangible suggestions on how Ford could address the issue and how the company should work to revamp its culture into one that is inclusive and safe for every worker.

OUTCOME
Over the course of these discussions, the company has implemented the following changes:

1. Independent monitoring and auditing of the factory floor
2. Frequent interactive, scenario based trainings, including bystander training
3. Increased checks and balances between HR and Personnel Relations
4. More coordination with the union
5. A stated commitment to centering victims in all thoughts and actions as incidents arise
6. Independent 3rd party vendor to manage the harassment hotline
7. Increased the presence of women on plant operating committees
8. The appointment of a “culture manager” on the firm operating committee to increase efforts across the firm
9. Removal of binding arbitration clauses in employment agreements
10. A stated commitment to pay equity, with 3rd party verification
11. Adoption of a zero tolerance policy that is victim-centered
12. More reporting channels that are independently reported to various levels of management, culminating at the Board level.

EOG RESOURCES

A U.S. PETROLEUM AND NATURAL GAS EXPLORATION COMPANY
REASON FOR ENGAGEMENT: Proactive engagement, initiated during due diligence phase, prior to investment

ENGAGEMENT ACTIVITY
When we started to review EOG Resources as a potential holding in our Global ESG Strategy, we were concerned about the lack of disclosures. After having several conversations with the company, not just with their Investor Relations department but also specialists focused on water management and safety, we recognized that the company’s lack of disclosure was mitigated by its operational efficiency. Thus, we encouraged the company to publish its first ever sustainability report to highlight their efforts. This dialogue has enabled us to gain a deeper understanding of their comprehensive approach to leak, detection and repair (LDAR), as well as the cost of water management to the business. These insights have further contributed to enhancing our fundamental thesis on EOG Resources. We are continuing to work with the company to identify appropriate climate change improvement targets, including discussions around scenario analysis and setting methane targets.

OUTCOME

1. Released its first ever sustainability report in October 2018
2. Disclosed a number or climate change performance metrics including methane emissions intensity

AMERICAN WATER WORKS

A U.S. WATER UTILITY

REASON FOR ENGAGEMENT: Multi-year, proactive engagement to enhance ESG transparency and communication.

ENGAGEMENT ACTIVITY
The series of dialogues and company site visits have enabled a more accurate depiction of ESG issues versus external data-provider ESG ratings. Our engagements have evolved to direct communication with the CEO and CFO on issues related to climate change reporting, materiality and alignment with the sustainable development goals in relation to the overall business model. Additionally, we have had access to their Chief Water Scientist to understand how the company is addressing emerging contaminants in the water supply.

OUTCOME
Over the course of these discussions, the company has implemented the following changes:

1. Discussed ESG information as part of their capital markets day
2. Committed to continuing the dialogue on enhanced reporting on climate change risk and alignment with the sustainable development goals

PROXY VOTING

RAM recognizes that ESG factors provide shareholders with an additional lens into the leadership quality, strategic focus and operational standards of a company, identifying potential investment risks and opportunities. We believe that well-managed companies are responsive to environmental and social impacts and take appropriate steps to manage and disclose policies, and performance with respect to these issues. RAM seeks to balance ESG issues with economic implications within the broader context of stewardship.

We review and vote ESG proposals on a case-by-case basis and assess whether adoption of a proposal is likely to enhance or protect long-term shareholder value. We will generally vote against resolutions that are overly burdensome and could harm the long-term interests of the company or place the company at a competitive disadvantage.

While we strive for collaborative engagements with our portfolio companies that lead to positive change, we also actively exercise our right as shareholders to vote proxies. Over the past few years, the level of ESG resolutions being filed has remained consistent but a significant percentage have been withdrawn following successful engagements with companies. We seek to vote in alignment with our Proxy Guidelines on these topics for all ESG Strategies.

OUR MEMBERSHIPS & WORKING GROUPS

As mentioned in our Mid-Year 2018 Report, we cannot pilot leadership alone and frequently leverage our voice as shareholders through the many impactful memberships and working groups. Below we highlight of some of the activities we spent our time working on in 2018.

RAM CLIMATE ACTION IN 2018

• RAM became the first and only US Asset Manager to join the UNEP Finance Investor Group to Pilot the TCFD Recommendations
• Conducted analysis under 4 different climate scenarios for 90% of RAM AUM
• Joined the Climate Action 100+, and became a supporting shareholder for all portfolio companies on the list
• Engaged most of our Global ESG Strategy companies on climate-related issues such as decreasing their carbon footprints, disclosing along the TCFD Recommendations and committing more R&D to lower embedded carbon products and services
• Over $400 million invested in Fossil Fuel Free Strategies (as of 12/31/18)

In 2018, we became members of the UN Environment Programme Financial Initiative, through which we were able to join their Pilot Project on Implementing the Task Force on Climate-Related Financial Disclosure (TCFD) Recommendations for Investors, alongside 19 other investors and as the only U.S. investor. The pilot is developing models and metrics to enable scenario-based, forward-looking assessments of climate-related risks and opportunities.

The outputs of this group will help ease TCFD adoption by the wider industry, including the 1,900 investor members of the Principles for Responsible Investment.

While the models are not entirely complete, they have afforded us the ability to systematically analyze how we assess and view the potential physical, transition and liability risks that Rockefeller Capital Management faces.

ESG FIXED INCOME

The ESG team and the Fixed Income team collaborate to research the issuing entity as well as the use of proceeds to help determine issues that may impact the health of the credit.

Bonds are researched on a case by case basis by the ESG Team, whether or not the issuance has been given a “Green” or Social Impact” verification. For corporates, analysis of the issuer takes the business model into consideration, as it frames the context for the use of proceeds and can help determine “greenwashing” from real action to improve the sustainability of operations. Jurisdictions of municipal issuers are taken into consideration to help assess the risks and opportunities of project financing. Each bond is also assessed against a proprietary framework developed to align with the UN Sustainable Development Goals, to quantify the impact of our strategies.

In 2018, our ESG Fixed Income strategies financed the following:

• Improvements made to water infrastructure which enhances the quality and access to drinking water; quality, efficiency and access to wastewater and sanitation facilities.
• Upgrades and renovations to make buildings more resource efficient; improve transportation systems in communities; and/or promotes access to internet and mobile network systems.
• Projects that seek to improve access to safe and affordable housing for low-income people, access to safe and affordable transport; upgrades and renovations to make community infrastructure more resilient (to climate change impacts)
• Improvements made to educational and research institutions that enhance the productivity, quality, and access to education and research; programs for emerging technical fields, STEM; training/re-training for jobs in the just transition
• Projects that support the development of renewable energy production and/or access to clean energy
• Upgrades that seek to reduce greenhouse gas emissions; energy efficiency projects/investments; projects to improve the resilience of buildings, communities etc. due to increasing climate risks (rising sea levels, heat waves, flooding, hurricanes/tropical storms, wildfires etc.); investments that seek to improve the monitoring of climate change and its impacts.

LOOKING FORWARD

As we look forward to 2019, we are motivated by all the projects in our pipeline. Along with seeking to continue our engagements on governance, climate change, drug pricing, diversity and discrimination in the workplace, cyber security and the blue economy, we are looking to:

Increase our integration of Sustainability Accounting Standards Board metrics into our investment process

As SASB codified its standards and we became members of the SASB Alliance at the end of 2018, we look forward to revising our frameworks to incorporate the new changes. Additionally, we plan on becoming more involved in the Alliance, to encourage greater adoption of the SASB standards by companies, and provide our feedback for the standards where we see fit.

Begin engagements with municipal governments in our fixed income portfolio

While the majority of our ESG efforts in the past have focused on our equity strategies, we are continuously developing our activities across other asset classes. Our next objective is to begin engaging with some of our municipal issuers on ESG topics such as structural violence in public housing and the resilience and safety of water infrastructure.

Release our first impact assessment in alignment with the UN SDGs.

In 2019, we plan to release our first impact report, which will assess the impact that our strategy is having in achieving the UN Sustainable Development Goals (UN SDGs). This will incorporate the ways in which our strategy contributes to – or detracts from the goals, by considering both the products and services as well as the operational footprint of our companies.

Expand our thematic research

In the coming year, the ESG team plans to explore a variety of environmental, social and governance trends. These trends will influence white-papers, investment opportunities, and/or deeper engagements with our companies. While this list will likely expand as the year unfolds, topics that we are looking to explore include the opportunities and risks stemming from electric vehicles, investing for racial justice, sustainable agriculture, water efficiency and plastics.

We look forward to your continued support and collaboration in the upcoming year.