Sustainability risk integration & organizational impact

ROBECO INSTITUTIONAL ASSET MANAGEMENT Contents

1. Introduction 3 4.7.2 Sustainable fundamental equities strategies 12 1.1 Regulatory Framework 3 4.7.3 RobecoSAM Thematic impact investing strategies and 1.2 Task Force for Climate related Financial Disclosures (TCFD) 3 SDG strategies 12 1.3 Evolving field 3 4.8 Fixed Income strategies 13 4.8.1 Fundamental Credits, Investment Grade and High Yield 13 2. Sustainability risk identification 4 4.8.2 Quantitative credits, Factor Credits and Conservative credits 13 2.1 Definition of sustainability risks 4 4.8.3 SDG Credit strategies 13 2.1.1 Identification 4 4.8.4 Climate strategies 13 2.2 Climate-related risks 4 4.8.5 Fundamental Government Bonds 14 2.3 Other sustainability risks 5 4.8.6 Quantitative Government Bonds 14 2.3.1 Sustainability risk characteristics 6 4.8.7 Aggregate Fixed Income 14 2.4 Relation with established risk categories 6 4.8.8 Loans Capability 14 4.9 Quantitative Multi-asset and other strategies 14 3. Internal Sustainability Risk Governance 7 4.9.1 LDI and matching strategies 14 3.1 Management board and committees 7 4.10 Robeco ONE, lifecycle funds 14 3.1.1 ERMC 7 4.10.1 Robeco ONE and lifecycle funds 14 3.1.2 SISC 7 4.10.2 Robeco Multi Asset Sustainable and Robeco ONE Duurzaam 14 3.2 Internal control framework 7 4.10.3 Internal guidelines 15 3.2.1 Investment teams 7 3.2.2 Risk management function 7 5. Risk management framework 16 3.2.3 Compliance function 7 5.1 Independent monitoring of sustainability risk 16 3.2.4 Internal audit function 8 5.2 Sustainability Risk Policy 16 3.3 Other relevant committees 8 5.2.1 Governance Structure 16 3.3.1 Climate Change Committee 8 5.2.2 Approach 16 3.3.2 SDG Committee 8 5.2.3 Scope 16 3.3.3 Sustainable Investing Research Board 8 5.3 Sustainability Activities, SFDR Designation 3.4 Remuneration policy 8 & the Risk Framework 16 3.5 Graphic Robeco’s Governance structure regarding 5.4 Sustainability Risk Profiles 17 Sustainability Risk Integration 8 5.5 The Three Pillar Approach 17 5.5.1 Pillar 1: Sustainability Investment Exclusions & 4. Investment due diligence 9 Negative Screening 17 4.1 Investment due diligence processes and procedures 9 5.5.2 Pillar 2: Sustainability Investment Objectives 19 4.2 Methods used for assessment and evaluation sustainability risks 9 5.5.3 Pillar 3: Sustainability Risk Analysis & Awareness 19 4.3 Sustainability research as key research pillar 9 5.6 Escalation and Reporting Process 20 4.3.1 Exclusion policy and negative screening 9 5.6.1 Monitoring of sustainability risk limits and targets 20 4.3.2 Active ownership 10 5.6.2 Reporting and escalation of findings 20 4.3.3 Reduce footprint 10 4.3.4 SDG investing 10 6. Distribution chain & client sustainability preferences 21 4.3.5 Sustainability-themed investing 10 6.1 Alignment across the distribution chain 21 4.4 Good governance assessment 10 6.2 Product governance 21 4.5 ESG integration per strategy 10 6.3 Client suitability assessment 21 4.6 Quantitative equity 10 6.4 Avoiding conflicts of interests 21 4.6.1 Conservative and Factor Investing 11 4.6.2 Core Quant equities 11 7. Disclosures + Reporting 22 4.6.3 Sustainable Conservative & Factor Investing 11 7.1 Internal reporting 22 4.6.4 Quantitative Sustainable Global Enhanced Indexing Equity 11 7.2 Reporting to Supervisory authorities 22 4.6.5 Core Quant Sustainable Emerging Markets 11 7.3 Disclosures at entity level 22 4.7 Fundamental equity 12 7.3.1 Climate risk related disclosures 22 4.7.1 Fundamental equity strategies 12 7.4 Disclosure at product level 22

2 • Sustainability risk integration & organizational impact 1. Introduction

Robeco’s corporate mission is to enable our clients to achieve their financial objectives through superior returns and solutions. Sustainability is key in fulfilling that duty and a key pillar of Robeco’s corporate strategy. We are convinced that investee companies with sustainable business practices have a competitive advantage and are more successful in the long-term. A proactive approach to measuring, managing and mitigating sustainability risk is therefore an essential part of our sustainable investing approach.

Climate change and other sustainability risks can materialize at many 1.2 Task Force for Climate related Financial Disclosures levels, from global and regional risks, to entity and product level risks. (TCFD) For asset managers it is therefore pivotal to carefully assess the financial Robeco supports the June 2017 TCFD recommendations which, in addition materiality of sustainability risks, following a proportionate and risk-based to disclosure requirements, also cover aspects of governance, strategy, approach. risk management, as well metrics and targets related to climate risks. Support of the TCFD also implies a commitment to implement these Robeco therefore integrates relevant sustainability risks in all aspects recommendations. Subsequently, our ESG integration measures are thus of its investment strategies, client solutions and organization. This also aimed to implement the TCFD recommendations. includes investment analyses and decisions, risk management, product governance & client suitability assessment processes, as well as the 1.3 Evolving field organizations governance of these processes. Our current sustainability risk integration measures are outlined in this document. The integration of sustainability risks is however an evolving This document aims to provide a comprehensive overview of Robeco’s field. The available data, expertise and tools to identify, measure and sustainability risk integration approach. It is based on underlying policies, mitigate sustainability risks and the related ability to deeper understand procedures and tools, which are outlined in this document. and measure sustainability risk will probably increase over time. Therefore, we will regularly review and, where relevant, recalibrate our The document is made publicly available on Robeco‘s website and sustainability risk integration processes to ensure that these remain fully updated on a regular basis, at least annually1. in line with these innovations.

1.1 Regulatory Framework Our sustainability integration measures comply with relevant provisions of the EU Sustainable Finance Framework, e.g.: - information disclosure requirements with respect to sustainability risk integration at entity and product level (Regulation on sustainability- related disclosures in the financial services sector - SFDR). - provisions to integrate sustainable risks in investment due diligence and risk management policies & processes and governance structures (UCITS Directive/AIFMD Delegated Acts). - provisions to integrate ESG factors in mandatory client suitability assessment & product governance processes (MIFID II Delegated Regulation).

The Dutch Authority for Financial Markets (AFM) has also stressed the importance of incorporating sustainability risks in investment and risk processes and internal organization of asset managers in its 3 July 2020 Sector Letter on Sustainability2.

1. Art 3 of the EU Sustainable Finance Disclosure Regulation requires Financial market participants publish on their websites information about their policies on the integration of sustainability risks in their investment decision-making process 2. https://www.afm.nl/~/profmedia/files/nieuws/2020/juli/sectorbrief-duurzaamheid.pdf?la=nl-nl

3 • Sustainability risk integration & organizational impact 2. Sustainability risk identification

2.1 Definition of sustainability risks Sustainability Risk Identification & Prioritization Sustainability factors - such as environmental, social and employee matters, respect for human rights, anti‐corruption, and anti‐bribery matters - may have a positive or negative impact on the financial performance of our investments. Investment Due Diligence Annual Enterprise + Sustainability Risk While sustainability factors can also have positive impacts (opportunities), Risk Appetite the sustainability risks for the purpose of integration are defined as the Management Framework negative materialization of the factors. Sustainability as a risk factor is relevant to all investments, while sustainability opportunities are typically Portfolio Management Enterprise Risk Management relevant to the products that have an ESG objective. + Risk Management Committee

For its sustainability risk integration approach Robeco applies the legal definition of sustainability risk included in the EU Sustainable Finance Disclosure Regulation (SFDR). In parallel, we run a holistic materiality analysis at entity level – as part of our annual internal risk appetite re-view - of potential risks, including ‘sustainability risk’ means an environmental, social or governance event sustainability risks, relevant to our business activities. The Materiality or condition that, if it occurs, could cause an actual or a potential material Map of the Sustainability Accounting Standards Board (SASB) and the negative impact on the value of the investment3. World Economic Forum Global Risk Report are important sources for our materiality analysis. Integrating climate-related and environmental This definition is also used in the amended UCITS Delegated Directive and risks into the inter-nal risk appetite increases Robeco’s resilience to the amended AIFMD delegated Regulation, which covers the majority such risks and improves its ability to manage those risks. This company of the mandatory policies and process requirements, as well as the wide risk assessment provides an additional source/double check to the organizational related requirements regarding sustainability risks. sustainability risk evaluations made by the different investment teams and risk management functions within Robeco and is used to confirm that The definition has two core elements (1) an event/condition from all potential risks have been properly identified and prioritized. the broad ESG spectrum that (2) could (poten-tially) cause a material negative impact on the value of the portfolio. This means that Robeco is The Sustainability component of our internal risk appetite is adopted by expected to identify relevant ESG risks and subsequently determine which the Enterprise Risk Management Com-mittee (ERMC) after consultation of them are material in the short, medium and long term with regard to with Robeco’s Sustainability Impact & Strategy Committee (SISC). its investment strategies. 2.2 Climate-related risks 2.1.1 Identification Climate-related risks are the financial risks posed by the exposure to an Sustainability risks can be climate-related, or related to other investment that may potentially contrib-ute to, or be affected by, climate environmental, social and governance practices. Sustainability risks can change. Following the adoption of the Paris Agreement, governments are be identified across asset classes, sectors and geographies, or on the basis en-deavoring to transition to low-carbon and more circular economies on of length and maturity. Robeco uses various proprietary and external a global scale. tools to identify and evaluate sustainability factors and related risks. Our Investment due diligence and Risk management frameworks – which On the European front, the European Green Deal sets out the objective include sophisticated sustainability integration and exclusion approaches- of making Europe the first climate-neutral continent by 2050. EU asset enable the different investment teams and risk management functions managers are expected to play a key role in this respect, as enshrined to identify and evaluate potential sustainability risks for our investment in the EU Sustainable Finance Plan. The Dutch Central Bank (DNB) also portfolios. expects investment managers to include material risks stemming from climate change in their Internal Capital Adequacy Assessment Process Once identified and evaluated as financially material for an individual (ICAAP)4. investment portfolio, sustainability risks and the mitigation thereof are directly integrated in the related investment and risk management processes. 3. Art 2(22) SFDR. Reference to this definition is made in AIFMD Delegated Regulation. 4. https://www.dnb.nl/nieuws/dnb-nieuwsbrieven/nieuwsbrief-vermogensbeheerders/ NieuwsbriefVermogensbeheerdersmaart2019/dnb382641.jsp

4 • Sustainability risk integration & organizational impact Robeco considers climate-related risks as financially material for all its environmental factors (such as air pollution, water pollution, scarcity investment strategies. This is underscored by our commitment to the of fresh water, biodiversity loss and deforestation), social issues and TCFD recommendations as well as our commitments to the Dutch Climate governance practices may also present serious risks to the value of our Accord and a Net Zero emissions target by 2050. portfolio investments and are therefore also considered.

Transition to a low-carbon and more circular economy entails, beyond The loss of biodiversity for example could have the same kind of material opportunities, risks for the regions, indus-tries and companies in which financial impact on an investment. Biodiversity loss is a material (physical) Robeco invests, whilst physical damage caused by climate change can risk with a potentially significant impact in that it threatens the ecosystem have signifi-cant impact on those regions, industries and companies as on which numerous economic activities depend. Investment funds well as the wider financial system. In addition to transition and physical and discretionary mandates may run risks through their investments in risks, climate change risk may also arise from clients or other persons companies whose supply chains are exposed to high biodiversity risks. seeking compensation for losses they may have suffered from the physical Robeco is a member of the Biodiversity Working Group sponsored by the or transition risks from climate change litigation risk5. Dutch Central Bank (DNB) who promote investing in biodiversity solutions and minimizing the risks associated with the loss of natural capital. Robeco seeks to take a forward-looking and comprehensive approach to considering climate-related risks. To run climate change scenario analyses Environmental and social risks are closely interrelated. The continuous and measure climate risk, Robeco has developed proprietary tools in deterioration of environmental conditions implies heightened social addition to possible third-party data provider instruments. To assess risks, such as when climate-related physical changes or water stress the impact of climate change, Robeco uses (forward looking) scenario affect deprived parts of a geographical area and already disadvantaged analysis available on Climate Value-At-Risk which provides a likely impact populations. Reputational impacts are then also possible. Poor on the return of a portfolios holdings. governance practices and/ or significant social issues may also have material financial impact on portfolio investments if the probability of 2.3 Other sustainability risks their occurrence is not sufficiently priced into the valuation of the affected Risks related to climate-related factors are therefore well-known, and assets or liabilities. methodologies and data to calculate and apply these are relatively mature. However, our sustainability risk identification and prioritization Therefore, Robeco’s sustainability risk identification covers a broad range assessments are not solely restricted to climate issues. Other of ESG factors, including (but not limited to):

Key sustainability factors

Environmental Social Governance Climate change vulnerability Compliance with recognized labour standards (e.g. no Risk & Business continuity management child labor) Carbon pricing Compliance with employment safety and health Integrity and ethical behavior protection Biodiversity Fair working conditions, diversity, and training and Information security and data protection development opportunities Water stress Product safety and customer welfare Board composition and remuneration Droughts Health & wellbeing of society (Infectious diseases, Regulatory and Tax Compliance Tobacco, weapons, human rights, political instability)

5. ‘Australian super fund REST settles climate risk litigation, setting possible global precedent’, Responsible Investor, 2 November 2020

5 • Sustainability risk integration & organizational impact 2.3.1 Sustainability risk characteristics vi) Data availability risk: sustainability risk integration underscores The relevance of a sustainability risk type for a portfolio depends on the need for reliable and high quality ESG information. ESMA has both the investment strategy and the risk type characteristics. Some acknowledged that there are operational challenges involved with sustainability risks may potentially have a negative impact on all ‘getting reliable data on sustainability risks and factors’7. The ECB has investment strate-gies, while others may only affect specific companies highlighted this as an impediment to the consistent use of ESG data by or sectors. The time horizon, likelihood of occurrence, likely impact and market participants and stresses that unreliable ESG data and ratings ability to control some sustainability risks are often uncertain. limit users in their capacity to conduct granular financial risk analyses8.

Sustainability risks may become relevant and lead to pressure for action Robeco acknowledges the relation of sustainability risks with established in the short term, as well as over the medium and long-term; and risk categories and therefore holds an integrated view on sustainability physical and transition risks are interdependent (e.g. the longer society risk management. Robeco incorporates sustainability risks as drivers of waits to reduce its greenhouse gas emissions, the worse the physical afore-mentioned established risk categories into Robeco’s existing risk consequences of climate change could be). management framework, with a view to man-aging and monitoring these risks over a sufficiently long-term horizon. 2.4 Relation with established risk categories Sustainability risks are often related to and may have an impact on other risk categories, or may be a factor to their materiality. Examples of the relation of sustainability risks with established risk categories include: i) Credit risk/counterparty default risk: The business model of an issuer of an investment grade bond may be severely damaged by transition risk (such as an unexpected CO2 Tax). ii) Market risk: An investee company that does not demonstrate management for transition towards a sustainable economy may lose value due to a decline in market sentiment (reflecting transition cost expectations) iii) Liquidity risk: If climate-related and environmental risks materialize (e.g. natural disaster) we may experience substantial outflows and/or a fund liquidity mismatch related to the financially material impact of physical risks on our operations in one or more relevant markets. iv) Operational risk: events like extreme weather conditions and epidemic diseases may impact our operations in one or more regions. v) Reputational risk: A key objective of the Sustainable Finance Framework is to counter greenwashing (i.e. marketing a product as sustainable while this is not justified). The AFM has noted6 that in its future Sustainable Finance supervisory activities attention will be paid to how financial parties manage the risk of greenwashing.

6. AFM Sector letter, July 2020. 7. In its 2019 final report on ESG risk integration in UCITS and AIFMD. 8. Eurosystem reply to the European Commission’s public consultations on the Renewed Sustainable Finance Strategy and the revision of the NonFinancial Reporting Directive (https://www.ecb. europa.eu/pub/pdf/other/ecb.eurosystemreplyeuropeancommissionpubliconsultations_20200608~cf01a984aa.en.pdf).

6 • Sustainability risk integration & organizational impact 3. Internal Sustainability Risk Governance

3.1 Management board and committees making around integration of sustainability risk taking into account the Robeco’s management board and key officers appointed to manage proportionality principles. Robeco (together the Executive Committee) bears overall responsibility for monitoring the implementation of the business, risk strategy and 3.2.1 Investment teams governance arrangements9. Accordingly, the Executive Committee is also The teams managing our investment portfolios have the primary responsible for the strategic considerations of integration of sustainability responsibility for managing the risk generated by their investment risks connected to its business activities and governance and control. activities throughout the lifetime of the portfolio. This principle is equally Collectively, the members of the Executive Committee are equipped with important for the integration of risks stemming from sustainability factors. sufficient knowledge to ensure that sound and well-informed decision To carry out this task in the first line of defense effectively, Robeco has are taken. Key function holders of the management Board – in particular incorporated the sustainability aspects of the investment strategies into the Chief Investment Officer and the Chief Financial Risk Officer - are adequate investment due diligence processes and procedures for the individually suitable including that they have sufficient knowledge, skills selection and monitoring of investments, taking into account Robeco’s risk and experience with regard to sustainability factors and related risks in appetite and sustainability risk management policies. their man-agement function. The Investment teams are supported by Robeco’s SI Center of Expertise, which unites comprises all of Robeco’s Sustainable Investment (SI) 3.1.1 ERMC professionals. The executive risk management committee (ERMC) is the body responsible for a comprehensive risk and over-sight framework within 3.2.2 Risk management function the managerial scope of the executive committee, including strategic Robeco’s risk management function is responsible for ensuring the proper consideration of sustainability risk integration. The ERMC is responsible risk controls, also in relation to sustainability related risks. Operating in for the evaluation and approval of the annual Enterprise Risk Appetite in the second line of functions, independent from the investment teams, which relevant sustainability risk aspects will be incorporated. The ERMC the measurement and monitoring of sustainability risks and setting also determines chang-es in policies for measuring, monitoring and relevant limits by the risk management function aims to ensure that the reporting on all relevant risk types, e.g. sustainability risk. The ERMC will material impact of sustainability risks is accounted for in the investment also periodically evaluate the effectiveness of the internal processes and decision-making process (active feedback loop) and overall minimize the governance of sustainability risk integration. The ERMC’s responsibility investments exposure to sustainability risks. regarding sustainability risk is included in the Charter ERMC. Robeco’s dedicated Sustainability Risk Policy describes how sustainability risks are measured and what kind of monitoring activities are performed. 3.1.2 SISC The sustainability risk policy is approved and evaluated by our Risk The dedicated body for the governance of sustainable investing at Management Committee (RMC). In chapter 5 the risk management Robeco is the Sustainability & Impact Strategy Committee (SISC). The framework in relation to sustainability risks is further described. SISC includes members of Robeco‘s Executive Committee, as well as The Risk Management function is also responsible for sustainability in the senior managers and specialists on sustainable investing across the enterprise risk management (ERM) framework. The Risk Management company. The SISC oversees all areas of business of Robeco that pertain to function incorporates climate risks in Robeco’s Internal Capital Adequacy sustainability and sustainable investing. The scope of the SISC includes: Assessment Process (ICAAP) framework to the extent these risks may - the sustainability strategy and the sustainable investing approach transmit prudential risks at entity level. Robeco’s ICAAP Climate Risk (e.g. ESG integration, Impact investing, SDG and Climate approach, assessment is aligned with TCFD. Sustainable Investing) - sustainable products (response to relevant regulatory developments, 3.2.3 Compliance function sustainable product developments, major changes to ESG Robeco’s Compliance function contributes to the risk management characteristics of existing SI strategies and SI labels) framework and monitors the alignment of Robeco activities with - sustainability Data Management & Engineering regulatory requirements, including sustainability regulatory aspects - sustainability Marketing & Sales and our own internal policies with sustainability elements (e.g. product governance policies, conflict of interest policies and client suitability 3.2 Internal control framework assessment procedures). The Compliance function plays a key role Robeco’s organizational structures, established around the ‘three lines in the quarterly quality review of products, e.g. products promoting of defense’ model, support and promote effective and prudent decision environmental or social characteristics and funds with sustainable

9. Art 60 Delegated Regelation (2013/231) and article 9(2) of the UCITS Delegated Directive (2010/43)

7 • Sustainability risk integration & organizational impact investment objectives. Part of the review is verifying whether the fund process-es in place are of the highest quality, including the assessment of remains consistent with any ESG preferences (where relevant) of the proposed amendments to the framework. target market. 3.3.3 Sustainable Investing Research Board 3.2.4 Internal audit function The function of the Sustainable Investing Research Board is to ensure Robeco’s Internal audit function addresses the appropriate handling of a close connection between the research and investment activities of sustainability risks as part of its audit activities. In particular, Internal Audit Robeco. With respect to the sustainability aspects of investments, the may include an assessment of the appropriateness and effectiveness of research board discusses, and monitors focus, prioritization and quality of the revised operational, risk management and governance structure as a sustainability research undertaken at Robeco, and is chaired by the Head result of the integration of sustainability risks. of Credit Research.

3.3 Other relevant committees 3.4 Remuneration policy Robeco’s remuneration policy is consistent with, and promotes, sound 3.3.1 Climate Change Committee and effective risk management and does not encourage risk taking which Robeco’s Climate Change Committee is a sub-committee of the SISC. It is exceeds the risk profiles of the portfolios we manage10. We consider responsible for the oversight of cli-mate change-related topics, adapting appropriate incentives-based mechanism vital to support achieving our existing investment strategies, risk management, and active ownership investment performance goals within an appropriate risk culture and to activities. account also for relevant sustainability risks. Our remuneration policy provides the right incentives to investment and risk management staff 3.3.2 SDG Committee members to take decisions in line with the sustainability considerations The responsibility of the UN Sustainable Development Goals (SDG) related to investment strategies and also facilitate the implementation Committee is to maintain and upgrade the SGD mapping framework used of relevant ESG risk-related factors consistent with our sustainability risk for many of our investment products, and to ensure that the systems and policy.

3.5 Graphic Robeco’s Governance structure regarding Sustainability Risk Integration

Supervisory Board

SISC Executive Committee Product Approval Board (PAC)

Enterprise Risk Management Climate change committee OPS Committee

SDG committee

Compliance Sustainable Investing Research Board Internal Audit

Risk Management Committee MT-Investments Department Risk Management Committee

Risk owners 10. Art 14b (1)(a)(b) UCITS Directive, Annex II AIFMD.

8 • Sustainability risk integration & organizational impact 4. Investment due diligence

4.1 Investment due diligence processes and procedures disciplined, risk-controlled way. Fundamental research, quantitative Robeco offers its clients an extensive selection of active investment research and sustainability research define our three key research pillars. strategies, covering a broad range of asset classes, and built around its Sustainability research ensures that a long-term investment view is key strengths of quantitative and sustainable investing, credits, emerging incorporated into our investment strategies. The SI research team is the markets and trends and thematic investments. basis for this. The team’s SI analysts are responsible for conducting a financial materiality analysis for a wide range of industries, with the aim Our Investment Due Diligence policy sets out how it is ensured that to identify sustainability factors that drive business value and that have investment decisions are carried out in compliance with the objectives, the greatest impact on long-term value assumptions used in financial the investment strategy and, where applicable, the risk limits of the analysis. The financial materiality analysis leverages our quantitative portfolio. Material sustainability risks related to the investment strategies research, which identifies which factors have demonstrated relevant are integrated in these processes and procedures for the selection and correlations to past financial performance. monitoring of investments. We have integrated sustainability risks in the investment decision-making process in the belief that this leads to In addition, SI analysts contribute to the fundamental investment analysis better-informed investment decisions and better risk-adjusted returns by determining which long-term economic, social or environmental throughout an economic cycle. factors are likely to have significant impact on a company’s business value drivers of growth, costs, risk, and ultimately, future financial performance. Portfolio managers and analysts are primarily responsible for conducting The basis for analyzing companies’ corporate sustainability is the S&P investment due diligence on their strategies on a daily basis. They are Corporate Sustainability Assessment (CSA), external sustainability supported by independent monitoring, performed by the Financial Risk resources (e.g. Sustainalytics) and Robeco’s proprietary Country Management and Investment Restrictions departments. The description Sustainability Ranking methodology. of investment due diligence processes is reviewed in case of material changes, at least on a bi-annual basis, and approved by the Risk Other tools used to integrate sustainability criteria can differ per strategy. Management Committee. 4.3.1 Exclusion policy and negative screening 4.2 Methods used for assessment and evaluation Robeco applies its exclusion policy to all listed assets under management sustainability risks from all funds over which it has full discretion. The policy entails Overall sustainability risks are integrated in Robeco’s investment due the exclusion of companies based on controversial behavior (based diligence processes by using an approach which is identified by the on breaches of the UNGC and OECD Guidelines for Multinational European Banking Authority (EBA) as the Exposure Method11. This means Enterprises) and controversial products (including controversial weapons, that we directly assess the performance and risk exposure in terms of E, S tobacco, palm oil and fossil fuel). In addition, we considers investing in and G at the individual investment level. This is done both (i) at point of government bonds (federal or local) of countries where serious violations stock selection and (ii) during the monitoring of investments. of human rights or a collapse of the governance structure take place as unsustainable. In addition, we follow applicable sanctions of the UN, The evaluation of ESG sustainability takes places through Sustainable EU or US to which it is subject and follows any mandatory (investment) Development Goals impact and ESG integration policies, exclusions and restrictions deriving therefrom. negative screening, and engagement dialogues with investee companies. These different sustainability criteria are implemented to varying degrees, In all funds managed by Robeco, the general exclusion policy applies as depending on the investment strategy, which is addressed in the following standard. Funds where only the general exclusion policy is applied qualify paragraphs of this section. for the product category ‘Sustainability Inside’. All other funds either fall into the product categories ‘Sustainability Focused’ or ‘Impact Investing’. To assess the impact of climate change, Robeco uses (forward looking) For these product categories, stricter exclusions apply. scenario analysis available on Climate VAR which provides a likely impact in the return of the holdings. This is identified by the EBA as the Portfolio The Robeco exclusion policy is not applicable to discretionary mandates Alignment Method. and client specific funds. For these accounts client specific exclusion lists can be applied. 4.3 Sustainability research as key research pillar Robeco’s investment strategies are research-driven and executed in a To all strategies, additional negative screening might be applied tailored

11. EBA 30 October 2020 Discussion paper on management and supervision of ESG risks for credit institutions and investment firms

9 • Sustainability risk integration & organizational impact to the sustainable characteristics or objective pursued by the strategy. 4.3.5 Sustainability-themed investing Sustainability-themed investments contribute to address social or 4.3.2 Active ownership environmental challenges by aiming to invest in companies offering As a signatory to the United Nations Principles for Responsible solutions to these issues. These issues may be, but are not limited to, Investments, Robeco’s dedicated Active Ownership team conducts population growth, food security, natural resource scarcity, energy security engagement activities based on clearly stated objectives. A relevant and climate change. subset of companies globally in clients equity and credit portfolios are targeted for a constructive dialogue on environmental, social and The integration of sustainability risks in the investment decision- governance factors. The Active Ownership department engages with the making process on portfolio level, is further detailed in product-specific aim of increasing long term value creation for shareholders. disclosures.

The Engagement Policy distinguishes two types of engagement: 4.4 Good governance assessment - Value engagement is a proactive approach focusing on material Assessment of good governance practices forms an integral part of sustainability themes which have the most potential to create value portfolios promoting environmental or social characteristics or pursuing for investors. The focus is on long-term, financially material ESG factors a sustainable investment objective (art. 8 and 9 SFDR classifications). that can affect companies’ ability to create value. Achieving impact Robeco assesses corporate governance performance through ESG on the UN Sustainable Development Goals is also an important integration as well as through actively exercising our stewardship consideration in our value engagement approach. responsibilities. - Enhanced engagement focuses on companies involved in controversial behavior. This includes companies that severely and structurally breach We focus on material ESG issues per industry and company. Corporate principles of the United Nations Global Compact in the areas of human governance is a material issue for almost all sectors and therefore taken rights, labor, environment and anti-corruption and/or the OECD into account in the investment analysis. We encourage good governance Guidelines for Multinational Enterprises. In case the engagement and sustainable corporate practices, which contribute to long-term is unsuccessful, the respective company will become candidate for shareholder value creation. Proxy voting is part of Robeco’s Active exclusion from the investment universe of Robeco. Ownership approach. The Robeco policy on corporate governance relies on the internationally accepted International Corporate Governance Voting at companies shareholder meetings is conducted based on the Network (ICGN) Global Governance Principles. IGCN principles and local governance codes. The Active Ownership team performs these activities with the goal of improving corporate behavior We actively use ownership rights to engage with companies on behalf and long-term investment returns. Voting is performed using the platform of its clients in a constructive manner. Through our value engagement and corporate governance research of a major proxy voting research firm. program Robeco focuses on long-term, financially material ESG The responsibility for deciding how to vote on ballot items lies with the opportunities and risks that can affect companies’ valuation and ability Active Ownership department, on the basis of Robeco’s Voting Policy. The to create value. The primary objective is to create value for investors by policy provides guidance on common proposals for shareholder meetings. improving sustainability conduct and corporate governance. Through our Analyses from RepRisk, Glass Lewis and Sustainalytics are used to make enhanced engagement program we focus on companies that severely and well-informed voting decisions. structurally breach minimum behavioral norms in areas such as human rights, labor, environment and anti-corruption. The primary objective 4.3.3 Reduce footprint of enhanced engagement is to address reported shortfalls against Strategies may aim for having a lower environmental footprint than the internationally accepted codes of conduct for corporate governance, social index on greenhouse gas emissions, water use and waste generation. responsibility, the environment and transparency.

4.3.4 SDG investing 4.5 ESG integration per strategy SDG (Sustainable Development Goals) investing aims at producing both The integration of sustainability risks in the investment decision-making an attractive return and alignment with the Sustainable Development process per strategy is outlined below. Descriptions on portfolio level are Goals. We have developed a proprietary framework, on the basis of which further detailed in product-specific disclosures. it measures a company’s exposure to the SDGs. SDG strategies focus on one or multiple goals by investing in companies with a neutral to positive 4.6 Quantitative equity exposure. Sustainability factors and risks are incorporated in multiple ways in quant equity investment strategies:

10 • Sustainability risk integration & organizational impact - ESG scores are integrated in the quant ranking model, to take ESG Also, portfolios aim to have a lower environmental footprint than the opportunities and risks into account and to tilt the portfolio toward applicable index. In addition to these dimensions of sustainability more sustainable stocks. integration, Robeco conducts proxy voting and engagement activities - The stock ranking model uses decarbonized value signals to reduce the which may be reflected in portfolio positioning as well. portfolio’s environmental footprint. - The portfolio construction algorithm ensures that the scores on 4.6.3 Sustainable Conservative & Factor Investing the ESG dimensions of the portfolio are at least as high as that of ESG factors are integrated into the investment process, by using the ESG the underlying index as a result of positive screening: companies scores from the S&P Corporate Sustainability Assessment (CSA). The with higher scores have a greater chance of an overweight in the ESG integration aims for a total ESG score of the portfolio that is at least portfolio. With this enhanced form of ESG integration the risk of being 20% higher than the index. Moreover, the scores on the Environmental, overexposed to less sustainable companies further decreases. Social and Governance dimensions should also be at least higher than - The quant equity portfolios aim for a lower environmental footprint the index, to ensure that the ESG enhancement is reached across all than the applicable index. three dimensions. This ensures that stocks with higher ESG scores are - A direct link between the enhanced engagement program and the more likely to be included in the portfolio while stocks of companies portfolio is applied. We do not overweight companies under enhanced that have very poor ESG scores are more likely to be divested from engagement for the duration of the enhanced engagement process, the portfolio. In addition, the environmental footprint of the fund is when rebalancing the portfolio. In case the enhanced engagement improved by restricting the GHG emissions, energy consumption, water is closed unsuccessfully, the company may be excluded from the use and waste generation, aiming for minimal 20% stricter levels than investable universe and any remaining positions in the portfolio can be the index. As a result, stocks with relatively low footprints have a higher sold. probability of being selected in the portfolio compared to stocks with poor environmental footprints. Thirdly, the fund will not invest in companies 4.6.1 Conservative and Factor Investing exposed to the following controversial sectors or business practices: ESG factors are integrated into the investment process, by using the ESG military contracting, controversial weapons, firearms, UN Global Compact scores from the S&P Corporate Sustainability Assessment (CSA) The ESG breaches, tobacco, gambling, adult entertainment, palm oil, thermal integration aims for a total ESG score of the portfolio higher than the coal, and alcohol, according to strict revenue thresholds. applicable index, and in addition a lower environmental footprint than the index. The portfolio construction algorithm ensures that stocks with 4.6.4 Quantitative Sustainable Global Enhanced Indexing higher ESG scores are more likely to be included in the portfolio while Equity stocks of companies that have very poor ESG scores are more likely to be ESG factors are integrated into the investment process, by using the ESG divested from the portfolio. In addition, stocks with corporate governance scores from the S&P Corporate Sustainability Assessment (CSA). The ESG issues or stocks that have major litigation or regulatory risk may be integration aims for a total ESG score of the portfolio that is at least 30% excluded from the investable universe. Next to ESG integration, Robeco higher than the index. This ensures that stocks with higher ESG scores are has an exclusion policy and conducts proxy voting and engagement more likely to be overweighted in the portfolio while stocks of companies activities. that have very poor ESG scores are more likely to be underweighted in the portfolio. In addition, the environmental footprint of the fund is 4.6.2 Core Quant equities improved by restricting the GHG emissions, energy consumption, water ESG factors are integrated into the investment process, by using the ESG use and waste generation, aiming for minimal 20% stricter levels than scores from the S&P Corporate Sustainability Assessment (CSA). First, the index. As a result, stocks with relatively low footprints have a higher the strategy adheres to Robeco’s general exclusion policy and stocks probability of being selected in the portfolio compared to stocks with poor with corporate governance issues or major litigation, or regulatory risks environmental footprints. Thirdly, the fund will not invest in companies may be excluded from the investable universe as well. Second, ESG exposed to the following controversial sectors or business practices: factors are part of the stock selection model as companies that score military contracting, controversial weapons, firearms, UN Global Compact well on sustainability possess quality characteristics. Third, ESG factors breaches, tobacco, palm oil and thermal coal, according to strict revenue are integrated in the portfolio construction process as we want to have thresholds. a positive exposure towards sustainable companies reflected in an aggregate ESG score of the portfolio that aims to be higher than the score 4.6.5 Core Quant Sustainable Emerging Markets of the index. As a result, stocks with higher ESG scores are more likely to ESG factors are integrated into the investment process, by using the ESG be overweighted in the portfolio, while stocks of companies that have scores from the S&P Corporate Sustainability Assessment (CSA). The poor ESG scores are more likely to be underweighted in the portfolio. ESG integration aims for a total ESG score of the portfolio that is at least

11 • Sustainability risk integration & organizational impact 20% higher than the index. Moreover, the scores on the Environmental, 4.7 Fundamental equity Social and Governance dimensions should also be at least higher than the index, to ensure that the ESG enhancement is reached across all 4.7.1 Fundamental equity strategies three dimensions. This ensures that stocks with higher ESG scores are All fundamental equity strategies integrate ESG factors into the more likely to be overweighted in the portfolio while stocks of companies investment process by analyzing the impact of financially material ESG that have very poor ESG scores are more likely to be underweighted from factors to a company’s competitive position and value drivers. If ESG risks the portfolio. In addition, the environmental footprint of the fund is and opportunities are significant, the ESG analysis could impact a stock’s improved by restricting the GHG emissions, energy consumption, water fair value and the portfolio allocation decision. In addition to this, for the use and waste generation, aiming for minimal 20% stricter levels than emerging market strategies the country sustainability ranking is used to the index. As a result, stocks with relatively low footprints have a higher determine the country risk. probability of being selected in the portfolio compared to stocks with poor environmental footprints. Thirdly, the fund will not invest in companies Robeco also applies its exclusion policy and conducts proxy voting and exposed to the following controversial sectors or business practices: engagement activities focused on specific themes, such as climate military contracting, controversial weapons, firearms, UN Global Compact change, aiming to improve a company’s sustainability profile. breaches, tobacco, gambling, adult entertainment, palm oil, thermal coal and alcohol, according to strict revenue thresholds.

Sustainability analyst Fundamental Equity analyst

4.7.2 Sustainable fundamental equities strategies 4.7.3 RobecoSAM Thematic impact investing strategies and All sustainable fundamental equity strategies integrate ESG at different SDG strategies stages of the investment process. The investment teams use sustainability The strategies in this group are designed to make a measurable performance rankings to focus their fundamental analysis on companies environmental or societal impact. The RobecoSAM thematic impact that have demonstrated superior sustainability performance compared to investing strategies are managed on the basis of a targeted thematic their peers. The impact of financially material ESG factors to a company’s universe. The portfolio is checked on the basis of the proprietary SDG competitive position and value drivers is then analyzed. If ESG risks and framework to monitor the impact on the relevant SDG’s. opportunities are significant, the ESG analysis could impact a stock’s fair value and the portfolio allocation decision. Throughout the investment In addition to the thematic impact investing strategies, we offer dedicated process, the investment teams strive for a low environmental impact, as SDG strategies. These strategies apply a proprietary SDG framework to measured by GHG emissions, energy consumption, water use and waste quantify the impact that companies have on the SDGs. Analysts use this generation, with the aim of realizing 20% better levels than the index. framework to determine the eligible investment universe. Eligibility is based on SDG scores assigned to each company based on its contribution In addition to ESG integration, we conduct proxy voting and engagement to the SDGs (positive, neutral or negative) and the extent of this activities focused on specific themes, such as climate change, aiming to contribution (high, medium or low). The scores are used in a screening improve a company’s sustainability profile. Furthermore, the strategies process, to define the investable universe that exclude companies with a will not invest in companies exposed to the following controversial Negative impact on the SDGs. sectors or business practices: military contracting, controversial weapons, firearms, UN Global Compact breaches, tobacco, palm oil and thermal These thematic impact investing and SDG strategies employ bottom- coal, according to strict revenue thresholds. up stock selection that combines proprietary ESG data and research

12 • Sustainability risk integration & organizational impact throughout the investment process. The SI research team integrates addition, some theme specific exclusions are applied. financially-material sector and company-specific sustainability analysis into investment cases. A dedicated thematic equity team incorporates 4.8 Fixed Income strategies SI research within fundamental analysis and stock valuations. Impact assessments of controversial incidences affecting portfolio holdings 4.8.1 Fundamental Credits, Investment Grade and High Yield provide additional risk management. An active ownership and The analysis of issuers includes the issuers’ performance on ESG factors in engagement team interacts directly with company management of order to improve the risk/return profile of the investments. ESG analysis fund holdings, offering additional channels for sustainable impact. The is integrated in the bottom-up security analysis. Key material ESG factors strategies contribute to the UN Sustainable Development Goals. The per industry are defined, and for every company an analysis is conducted investment universe excludes companies that are involved in any of the to determine how the firm is positioned versus these key ESG factors, and following activities: Global Compact breaches, controversial weapons, how this impacts the fundamental credit quality. ESG factors are one of tobacco, unsustainable palm oil production, military contracting, firearms, the five pillars that constitute an analyst’s fundamental view of a bond thermal coal, nuclear power, alcohol, gambling, and adult entertainment. issuer, and to compile a fundamental score (F-score). The other factors are There are certain thresholds like 0% tolerance for controversial weapons business position, strategy, financial position, and corporate structure. while other criteria have thresholds like 5%, 10% or sometimes 20%. In

4.8.2 Quantitative credits, Factor Credits and Conservative strategies. Eligibility is based on SDG scores assigned to each issuer based credits on their contribution to the SDGs (positive, neutral or negative) and the ESG analysis is incorporated into the investment process to ensure that extent of this contribution (high, medium or low). The scores are used in companies with higher ESG scores are more likely to be included in the a screening process, to define the investable universe that exclude credits portfolio, and vice versa. With these portfolio construction rules the aim with a Negative impact on the SDGs. In addition to the universe screening, is to achieve an ESG profile of the strategy that is better than the index. credit analysts integrate ESG factors in their analysis of the companies’ In addition, credit analysts use external sources to identify additional ESG fundamental credit quality which is used to assess the downside risk of risks, e.g. corporate governance issues or companies that have major credit investments. Furthermore, the portfolio’s environmental footprint is litigation or regulatory risks. If these ESG risks may result in a material actively reduced, and a part of the portfolio is allocated to green bonds. financial impact, the strategy will not invest in these companies. 4.8.4 Climate strategies 4.8.3 SDG Credit strategies Climate change considerations are fully integrated in the research process, SDG credit strategies look for investments with a positive societal impact, from an impact and risk perspective. The greenhouse gas emission whilst generating healthy financial returns. Impact is defined as an intensity of issuers is a starting point for determining the impact on alignment with the UN Sustainable Development Goals (SDGs). These climate change. A forward-looking element is added to the research dedicated SDG strategies apply a proprietary SDG framework to quantify process by assessing the decarbonization potential, strategy and targets, the impact that companies have on the SDGs. Analysts use this framework in order to ensure the strategy follows the desired decarbonization to determine the eligible investment universe for the SDG Credits trajectory. Robeco’s climate bond strategies aim to align with the Paris

13 • Sustainability risk integration & organizational impact Agreement requirements on greenhouse gas emission reduction. Green account by analysts during credit committees. bond strategies aim to finance projects that have a beneficial impact on the environment, by investing in Green Bonds. 4.9 Quantitative Multi-asset and other strategies

Analysis of issuers includes the issuers’ performance on ESG factors. 4.9.1 LDI and matching strategies This includes the assessment of climate related risks, both in country Based on the exclusion policy, government bonds issued by controversial analysis and credit analysis. ESG analysis is integrated in the bottom-up countries are excluded from the investable universe. The scope of issuers security analysis. For investments in sovereigns, Country Sustainability of bonds within these strategies are very limited. The strategies only hold Ranking and underlying research is used as input for assessment of the positions in Core Euro government bonds for reasons of liquidity and structural outlook for a country. For credits, the ESG analysis is part of the creditworthiness. ESG is integrated in the analysis of these countries in fundamental scoring by the sector analyst. line with paragraph 3.6.3.5 Government debt, the Country Sustainability Ranking and underlying research is used as input for assessment of the 4.8.5 Fundamental Government Bonds structural outlook for a country. In some strategies there is a limited In government bond portfolios, the active country allocation is based on position in credit funds of Robeco. Within this allocation ESG integration is a combination of top-down and bottom-up analysis. In the bottom-up an integral part of the investment process. analysis, besides financial health and economic cycle, ESG criteria are an integral part of the analysis. For the top-down analysis, RobecoSAM For a certain LDI strategy Sustainability is an important factor within the Country Sustainability Ranking (CSR) is used in country allocation investment process. ESG factors are systematically integrated into the decisions. The CSR is a comprehensive and systematic ESG ranking investment process in several ways. An extensive exclusion list covering framework for countries and acts as an early-warning system which helps various controversial countries, sectors or business practices applies. to identify problems as well as opportunities in countries well before In addition, the investable universe is monitored for companies with they are reflected in spreads or are picked up by the rating agencies. The governance issues, major litigations or regulatory risk. For investments in resulting country sustainability ranking is updated twice a year. Changes sovereigns, the Country Sustainability Ranking and underlying research in scores and ranking act as a flag for developments that could be is used as input for assessment of the structural outlook for a country. relevant. In addition, the investment team discusses individual countries Furthermore, the strategy holds a substantial position in green bonds. on a regular basis to identify material changes in their ESG profile. 4.10 Robeco ONE, lifecycle funds 4.8.6 Quantitative Government Bonds In line with Robeco’s Exclusion Policy, government bonds issued by 4.10.1 Robeco ONE and lifecycle funds controversial countries are excluded from the investable universe of the Robeco ONE primarily invests in Robeco funds, for which the integration strategy. of sustainability risks is described above. For direct investments the same investment due diligence is performed as described in the relevant 4.8.7 Aggregate Fixed Income paragraph for equity, credit and government debt. Capabilities from other ESG factors are integrated into the investment process, both in country asset managers might be selected if no comparable Robeco product is analysis and credit analysis. For investments in sovereigns, the Country available. Such funds are currently out of the scope of the sustainability Sustainability Ranking and underlying research is used as input for screening. assessment of the outlook for a country. For credits, the ESG analysis is a fixed part of the fundamental analysis by the credit analyst. 4.10.2 Robeco Multi Asset Sustainable and Robeco ONE Duurzaam 4.8.8 Loans Capability Robeco Multi Asset Sustainable primarily invests in Robeco funds, for Most companies in the portfolio of the strategy are not covered by any which the integration of sustainability risks is described above. The (external) ESG data provider. Robeco’s sector analysts integrate their thematic impact funds in the portfolio intentionally seek measurable industry knowledge on potential ESG-factors in every loan analysis. social and environmental benefits alongside a financial return. Analysts also use input from conversations with the borrower and the participating bank. Analysts then focus on ESG-risks which could materially Principal adverse impact and financially alter the investment case. The factors discussed are diverse Investment decisions can in theory lead to negative, material or likely from Corporate Governance issues, supplier risks, exposure to bribery to to be material effects on sustainability factors. These negative impacts reputational issues. The loan documentation also often contains specific are also referred to as Principal Adverse Impact (PAI). Robeco prioritized clauses regarding environmental issues. These ESG factors are taken into adverse impact indicators per strategy. Analysts and portfolio managers

14 • Sustainability risk integration & organizational impact will use the adverse impact indicators as input for their investment decisions. A first statement on Robeco’s approach towards PAIs will published on Robeco’s website by June 2021.

4.10.3 Internal guidelines Each portfolio conforms to a series of internal guidelines and restrictions to promote diversification and minimize material risk, including risk stemming from sustainability factors, while facilitating the actively managed nature of the portfolio. These portfolio and investment guidelines are monitored by the investment team on a daily basis.

15 • Sustainability risk integration & organizational impact 5. Risk management framework

5.1 Independent monitoring of sustainability risk 5.2.3 Scope Robeco’s Portfolio management teams are responsible for the daily The policy applies to all funds managed by Robeco. In case of mandates, monitoring of portfolios, including any sustainability risks. The Financial the monitoring takes place based on client preferences stated in the Initial Risk Management department performs an independent monitoring Master Agreement (IMA). Sustainability targets and controls defined in function, overseeing market, liquidity and sustainability risks and the IMA are directly monitored from the second line of defense. In case applying stress tests to capture potential extreme losses. The monitoring there are no sustainability targets and controls defined in the IMA, the of sustainability risks is described in the Sustainability Risk Policy (SRP). Sustainability Risk Policy applies. This policy describes sustainability risk limits and controls and the way any possible exceedances of these risks are coped with. 5.3 Sustainability Activities, SFDR Designation & the Risk Framework 5.2 Sustainability Risk Policy The Robeco exclusion policy is applied on all strategies and can be considered the base of the sustainability risk mitigation along with 5.2.1 Governance Structure negative screening activities. This forms the first pillar of the sustainability The SRP is largely based on the same governance structure as the other risk policy. risk policies, such as Market Risk Policy, Counterparty Risk Policy, and Liquidity Risk Policy. In terms of roles and responsibilities, this means that: The second pillar consists out of sustainability activities that further • Robeco’s Risk Management Committee (RMC) is responsible for the reduce the sustainability risk of a portfolio. SDG investing and approval of the SRP as well as for overseeing the establishment and sustainability-themed investing are the two activities that involve primary implementation of a risk management framework, including policies, sustainability objectives. Hence, these strategies have the article 9 procedures, systems and methodologies, and for assuring they are designation. Other activities, such as ESG integration, entail activities complied with. with an aim in combination with financial returns. Hence, sustainability • The Department Risk Committees (DRMC) support the RMC. The RMC thresholds are used, and the portfolio manager has room to temporarily delegates to DRMC’s the determination and periodical review of a deviate from these thresholds in combination with the right arguments consistent set of limit and control structures for individual products and (Comply or explain approach). Strategies with a focus on these activities decisions made on the department level. are therefore designated as article 8 strategies. • Financial Risk Management (FRM) is responsible for the coordination of the policy, and is tasked with day-to-day risk oversight, monitoring Climate risk analysis takes place for all the portfolios, regardless of the and the escalation process. The monitoring of portfolio restrictions is SFDR designation. Risk Management will actively communicate and outsourced to the Investment Restrictions department. discuss these risks with portfolio management. Active ownership is not • Portfolio managers are responsible for maintaining levels of portfolio part of the monitoring by Risk Management because Risk Management risk consistent with the representations made to clients and/or does not have the mandate for this. required by client and internal guidelines. • The Sustainability and Impact Strategy Committee (SISC) is responsible for the approval of the data and metrics that are used to assess the different forms of sustainability risk. This is a distinction with the other risk policies since FRM is tin those cases the owner of the risk metrics and methodologies.

5.2.2 Approach The Sustainability Risk Policy should ensure portfolio compliance with its sustainability limits and thresholds and increase the sustainability risk awareness over the investment chain. This is reached by a three-pillar approach that determines the sustainability character of a strategy, sets goals, targets and limits, and in-depth analysis and discussion of sustainability risks. These three pillars described in the next paragraphs, are (1) Sustainability investment restrictions & negative screening, (2) Sustainability investment objectives, and (3) Sustainability risk analysis & awareness.

16 • Sustainability risk integration & organizational impact Allocating funds to ESG categories

SFDR Classification Type Art 6. Exclusions Only Art 8. Promoting Art 9. Sustainability Strategies Environmental and/or Social Investment Objectives13 Characteristics12 Pillar 1 Exclusions √ √ √ Negative Screening X X Pillar 2 ESG Integration X X Active Ownership X X Reducing Environmental Footprint X X SDG Investing X Sustainability-Themed Investing X Pilar 3 Climate Risk Analysis √ √ √

5.4 Sustainability Risk Profiles a qualitative assessment takes place about the strategy’s sustainability Each strategy is categorized in low, medium or high sustainability risk. The characteristics. The combination of these two assessments results in the starting point for this designation is a comparison of the sustainability risk final sustainability risk designation of the strategy which is disclosed in the profile of the strategy versus a reference index. This first step, described in fund disclosures on Robeco’s website. the table below, serves as guidance for the final risk designation. Second,

Sustainability Risk Profile Guidance

Classification Description Low The strategy’s score in terms of sustainability risk is at least 20 percent lower than the refer-ence index. The assessment takes place based on the investment objectives of the strategy and the corresponding data. Example: a strategy applies ESG integration using Sustainalytics ESG Risk ratings where the lower the ratings, the lower the ESG risk. The portfolio has a rating of 25, while the reference index has a rating of 40. This means that the sustainability risk of this strategy is classified as ‘low’. Medium The strategy’s score in terms of sustainability risk does not significantly deviate from the profile of the reference index. The assessment takes place based on the investment objectives of the strategy and the corresponding data. Example: a strategy applies ESG integration using S&P Smart ESG ratings where the higher the ratings, the more sustainable the portfolio is. The portfolio has a rating of 80, while the refer-ence index has a rating of 70. Although the portfolio is more sustainable than the benchmark, the sustainability risk of this strategy is classified as ‘medium’. High The strategy’s score in terms of sustainability risk is at least 20 percent worse than the refer-ence index. The assessment takes place based on the investment objectives of the strategy and the corresponding data. Example: a strategy applies an SDG investing strategy where -3 represents the most negative score, while +3 represents the highest score. The portfolio has a neutral average score of 0, while the reference index has an average score of 1.5, which is significantly better. This means that the sustainability risk of this strategy is classified as ‘high’.

5.5 The Three Pillar Approach 5.5.1 Pillar 1: Sustainability Investment Exclusions & Negative The SRP is based on three pillar that together form the policy. The first Screening pillar entails the base sustainability activities that are applied on all All funds managed by Robeco are subject to an exclusion list, that Robeco strategies. The second pillar entails sustainability risk objectives. excludes companies exposed to significant environmental, social The third pillar entails extensive sustainability risk analysis with a special and governance risks with respect to human rights, labor standards, attention to Climate Risk. environmental, and corruption, as such preventing exposure to controversial companies and mitigating the risk.

12. At least one of the Pillar 2 activities is applied. Negative screening (Pillar 1) depends on the strategy 13. At least one of the Pillar 2 activities is applied. Negative screening (Pillar 1) depends on the strategy

17 • Sustainability risk integration & organizational impact The exclusion list that is applied may differ depending on the type of strategy. The table below gives an overview in the exclusion categories and the distinction between these. The Robeco exclusion policy is published on Robeco.com14.

Exclusion categories

Exclusion Criteria Exclusion sub-area Company revenue Sustainability Sustainability Impact threshold (max %) Inside Focused Investing Controversial behavior Own Operations, Supply Chain, UNGC Principles and OECD 0% √ √ √ Guidelines Controversial weapons Anti-personnel mines, cluster munition, chemical and 0% √ √ √ biological weapons, depleted uranium weapons and nuclear weapons Tobacco Production 0% √ √ √ Key Parts 50% Palm Oil Non-RSPO certified, production 80%3 / 20%4 5 √ √ √ Fossil fuels - Thermal coal Coal mining, Coal based energy production 25%1/10%2,3 √ √ √ Fossil fuels – Oil sands Production 25%1/10%2,3 √ √ √ Fossil fuels – Arctic drilling Production 10%1/5%2,3 √ √ √ Countries/Sovereign debt Human Rights, Governance, Sanctions N.A. √ √ √ Military contracting Weapon systems, Tailor-made components 5% √ √ Firearms Production 0% √ √ Nuclear power Electric Utilities 30% √ √ Alcohol Production 5% √ Retail 10% Gambling Production, Services 5% √ Adult entertainment Production, Services, Print 5% √

The negative screening process is monitored via fund specific filtering. These filtering lists are shared with Investment restrictions and coded into the restriction monitoring system as an additional exclusion.

14. Robeco exclusion policy is published here: https://www.robeco.com/docm/docu-exclusion-policy.pdf

18 • Sustainability risk integration & organizational impact 5.5.2 Pillar 2: Sustainability Investment Objectives Based on the strategy’s commitment to sustainability, risk limits and thresholds are determined. Based on the sustainability activities and commitments, monitoring will take place to check whether strategies are compliant with these sustainability targets and objectives. The table below, gives an insight in the way this is done.

Sustainability Investment Objectives

Activity Comment ESG Integration Follows a ‘comply or explain’ principle. Strategies with a commitment to a better ESG profile than its benchmark receive a threshold. In case the portfolio’s threshold is hit, escalation takes place. The PM needs to provide comments on the strategy and its ESG profile. This will be actively discussed and logged. A distinction is made between fundamental and quant strategies in terms of data. For quant the S&P Smart ESG Score is used, while fundamental portfolios make use of the Sustainalytics ESG Risk Rating SDG – SDG Investing For strategies with a commitment to the SDGs, restrictions apply that no negative scoring positions are allowed. In case of new issuances, the analyst assigns a temporary SDG score to the issue. This score is assessed for final verdict by the end of the month. In case an issue is negative, the portfolio manager needs to adjust the portfolio within a certain grace period. SDG – Thematic funds with a For thematic strategies with a commitment to specific SDGs, the investable universe is determined by a ‘Sustainable Theme Reference’. reference to SDG’s In case investments take place in issues that are part of this universe whilst possessing a negative SDG score, the SGD Committee will discuss whether the issue is in line with the specific SDG and does no significant harm. In case of a negative judgement, the portfolio manager needs to adjust the portfolio within a certain grace period. Reduce footprint – General Strategies that commit to the reduction of the environmental footprint are measured versus the benchmark in term of CO2 footprint, approach waste generation, and water usage. All elements are monitored based on normalization by revenues. The threshold applies that all of these scores are at least equal or better than the benchmark. In case a threshold is hit, the top contributors are reported, and the portfolio manager needs to give its view on the portfolio and contributors. This will be actively discussed and logged. Reduce footprint – Paris aligned Strategies that are managed against a Paris Aligned Benchmark (PAB) are restricted in terms Carbon Intensity versus the benchmark. portfolios Monitoring takes place based on the same definitions as used in the benchmark. In case a limit is hit, the portfolio manager must bring the portfolio back in line with the limits. Sustainability themes Strategies with a specific sustainability theme frequently commit to a minimum exposure (mostly 66.7%) to companies that suit the sustainability theme. Using the Strategic Theme Reference (STR), the investments in the portfolio are identified and measured against this minimum exposure commitment by Risk Management.

5.5.3 Pillar 3: Sustainability Risk Analysis & Awareness company. Based on this score, the climate risk profile of a portfolio can be The first two pillars determine the sustainability character of strategies compared to its benchmark. FRM also uses this indicator to break down and the way in which Robeco ensures compliance with the sustainability conventional market risk measures into attributions of the CRI scores. profiles. The third pillar entails in-depth analyses of portfolios related to This includes risk measures such as Tracking Error, Duration, Volatility and Climate Risk. The goal of this third pillar is to increase sustainability risk Credit Spread Sensitivity. Dashboards with these breakdowns are actively awareness and create an active feedback loop about the sustainability shared and discussed with portfolio managers. considerations within strategies. The analysis focusses on climate risk and is based on three elements: (1) Climate Risk Indicator, (2) Climate Risk The Climate Risk Indicator is considered a temporary toolkit for climate Scenario Analysis, and (3) Climate VaR analysis. risk analysis. Since the indicator requires scarce resources for maintenance and further development, the intention is to move to a vendor-based 5.5.3.1 Climate Risk Indicator solution with a similar metric. FRM and SI Research developed a Climate Risk Indicator (CRI) that provides an indication of the adaptive capacity of a company to a carbon 5.5.3.2 Climate Risk Scenario Analysis neutral economy. Each company gets a score ranging from 1 to 10, where Next to the Climate Risk Indicator, FRM makes use of several Climate 1 represents a relatively sustainable company and 10 a relatively polluting Risk scenarios to estimate the potential financial impact on strategies,

19 • Sustainability risk integration & organizational impact both on an absolute and relative level. These scenarios entail internally 5.6 Escalation and Reporting Process developed scenarios as well as external scenarios provided by the Dutch Central Bank and MSCI. Using these scenarios, portfolios climate risk 5.6.1 Monitoring of sustainability risk limits and targets sensitivities and expected performance can be measured. The results of The monitoring of sustainability risks takes place in a similar way as other these scenarios can also be combined with the CRI scores. Like the CRI financial risks monitored from the second line of defense. Based on the dashboards, the scenario results are actively shared and discussed with relevant limits and controls, monitoring takes place. In case a threshold is portfolio managers. reached or a limit is breached, the portfolio manager will be informed. In case a sustainability risk limit is breached, the portfolio manager is 5.5.3.3 Climate VaR analysis required to adjust the portfolio to get back within limits. Using MSCI Climate VaR, FRM assesses the potential financial sensitivity In case a threshold is reached, the principle of ‘Comply or Explain’ applies. to climate risks and opportunities and estimate the impact of climate Risk Management will inform the portfolio manager (PM) about the hit change on the portfolio value. This is done using transition and and ask to provide comments on the portfolio sustainability positioning.. physical risk scenarios. In addition, MSCI Climate VaR has a Warming These comments are actively discussed and logged. These findings serve Potential Gauge, which provides insight into the alignment of current as input for Sustainability Risk deep dive sessions between the PM and investments with the climate goals of the Paris Agreement. This allows FRM and are reported to the Risk Management Committees. for standardized comparison between strategies and on a capability level. Standardized Climate VaR pdf reports are actively shared and discussed 5.6.2 Reporting and escalation of findings with portfolio managers. The reporting and escalation of findings pursuant to the Sustainability Risk Policy follow the same process as other risk policies, such as the Market Risk Policy. - All breaches and triggers are reported to the Department Risk Management Committee (DRMC). The DRMCs can discuss these findings. This is also reported to Robeco’s Risk Management Committee (RMC). - A sustainability risk dashboard will be reported to the DRMCs and RMC for information. - The results of the Sustainability Risk deep dive sessions between Portfolio Management and Risk Management will be reported for information to the DRMCs and RMC. - Any long-lasting breaches are marked in the Products section of the Financial Risk Report. This report serves as input to Compliance for the ‘Products at Risk’ report. This report is discussed within the Product Approval Committee and, if required, in the Enterprise Risk Management Committee.

20 • Sustainability risk integration & organizational impact 6.1 Alignment across the distribution chain to identify the client’s sustainability preferences as part of the mandatory The integration of sustainability risks in Robeco‘s investment strategies, suitability assessment which is updated annually. products and organization is not conducted in isolation. As clients justify our existence, we are determined to focus on their needs and interests, Based on the obtained client information, Robeco selects and tailors its including any sustainability preferences they may have. Across the recommended mandate services and/or financial products, taking into distribution chain, we have implemented several measures to ensure that account costs, the identified financial objectives, risk tolerance as well as investment services and products properly reflect the needs and objectives any sustainability preferences of the individual client. of our clients with regard to sustainability. For clients that have expressed sustainability preferences, Robeco will only 6.2 Product governance consider eligible financial products based on Sustainability Investment The MiFID Product governance requirements aim to prevent mis selling Objective strategies or ESG Promoting strategies. of financial products and other product issues from occurring, and to improve the quality of investment products through their lifecycle. A key 6.4 Avoiding conflicts of interests element is that product manufacturers are responsible for determining Preventing and controlling conflicts of interest at Robeco is an important the right target market for the product and to ensure that products do not element in ensuring that the interest of clients is protected. Based on (structurally) end up outside the target market. Robeco’s Conflict of Interest Policy, Robeco structurally analyzes potential conflicts of interest and takes additional measures in case it is concluded The following actions have been taken to ensure that our product and that a (potential) conflict of interest is not being managed effectively. We portfolio management ser-vices are fully offered in the interest of clients have modified our Conflict of Interest Policy to ensure that the inclusion and that sustainability factors are taken into account in the target market of ESG factors in our discretionary portfolio manage-ment, investment assessment: advice and financial product services does not damage the interest of any - Robeco’s Target Market Policy is modified to safeguard that any clients. relevant specific ESG prefer-ences are taken into account when identifying or reviewing the suitability of a product or portfo-lio Clients’ interests could be harmed for instance if ESG considerations are management service for that specific target market. mis-used as an excuse to sell proprietary products or more costly products, - ESG Promoting products and Sustainability Investment Objective or to generate unnecessary churning of clients’ portfolios, or by firms products all have target mar-kets with ESG preferences that are misrepresenting products or strategies as fulfilling ESG preferences where communicated to distributors through the standardized Euro- they do not15. pean MiFID Template (EMT v 3.1), which is aligned with the SFDR EU classification. This facilitates distributors to conduct their own suitability assessment. - ESG elements have also been integrated in the Robeco’s Product Quality Procedure (PQP) and the Mandate Quality Procedure (MQP), which ensure that Robeco acts in the clients’ best inter-est during all stages of the life cycle of products and services.

6.3 Client suitability assessment For our portfolio management services (mandates) and, where relevant, investment advice as investment services, Robeco performs a MiFID client suitability assessment to obtain information on the individual (potential) client financial information, its investment objectives, and issues related to risk, i.e. the client’s risk tolerance (attitude to investment).

To incorporate sustainability factors, we have modified the suitability assessment procedure and processes (e.g. Client intake questionnaire). As of March 2021, Robeco will ask potential and existing clients questions

15. ESMA proposed new recital 59 (bis) of the MiFID II Delegated Regulation (ESMA technical advice to the European Commission on integrating sustainability risks and factors in MiFID II, 30 April 2019 (ESMA 35-43-1737) p. 16).

21 • Sustainability risk integration & organizational impact 7. Disclosures + reporting

Robeco’s reports make disclosures on the integration of sustainability risks 7.4 Disclosure at product level both at entity level and at product/mandate level, at regular intervals. Relevant sustainability risk information is also included. Funds A description of the manner in which sustainability risks are integrated in 7.1 Internal reporting the investment decisions of a fund and the results of the assessment of The identified and evaluated sustainability risks for our investment the likely impact of sustainability risk on the returns are included in fund strategies are integrated within the frame-work of internal risk reporting, prospectus as well as on the website. as part of existing reporting channels. The typical characteristics of sustainability risks, e.g., a medium to long-term horizon, are taken into Mandates and investment advice services account. For (new) mandates and investment advice service clients, a description of the manner in which sustainability risks are integrated in the investment 7.2 Reporting to Supervisory authorities decisions of the mandate and the results of the assessment of the likely Robeco reports annually to the Dutch Central Bank (DNB) on its Internal impact of sustainability risk on the returns are included in the MiFID Capital Adequacy Assessment Process (ICAAP) a description of the risk precontractual information as well as on Robeco’s website. appetite/tolerance levels, thresholds and limits set for the identified material risks, as well as the time horizons, and the process applied to keep such threshold and limits up to date. Since 2018, climate risks scenario’s, covering the horizon of materialization of these risks, for the short, medium and long term, are included in Robeco’s ICAAP.

7.3 Disclosures at entity level Through the availability of the sustainability risk integration disclosure document on Robeco’s website, Robeco discloses how it integrates sustainability risks in its investment decisions and across Robeco’s wider organization in alignment with SFDR (art 3). The document will be updated at least annually.

7.3.1 Climate risk related disclosures A Climate risk related disclosure in accordance with the TCFD recommendations, where relevant taking into account the EU Non- Financial Disclosure Guidelines, will be made available via Robeco’s annual sustainability report.

The climate risk related disclosure is also compliant with Robeco’s commitment under the Dutch Climate Agreement and its commitment to achieve net zero carbon emissions over all its investments by 2050 (which means 40% by 2030).

22 • Sustainability risk integration & organizational impact www.robeco.com [email protected] The Netherlands 3014AD Rotterdam Weena 850 Head of Sustainable Investing Carola van Lamoen Robeco Institutional Asset Management B.V. Contact

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