Semiannual Commentary Oct 20 – Mar 21 AB GLOBAL EQUITY BLEND PORTFOLIO ENGAGEMENT REPORT: OCT 20–MAR 21 Energy to partner with PetroChina’s treasury function. In this During the six-month period ending in March, AB portfolio partnership, PetroChina Finance acts as an internal bank for its managers and analysts engaged with the senior management subsidiaries, aggregating cash and lending it to them at a lower and/or boards of directors of companies held by the AB Global rate. In 2019, Kunlun Energy met with European clients on ESG Equity Blend Portfolio on a range of subjects including modern and, as a result, has increased its focus on ESG-related topics. slavery, labor disputes and talent management. We engaged with management at Kunlun Energy to discuss the recent transaction as well as to check on the status of the Summary reports of a selection of our engagements with company’s ESG initiatives. companies during the period follow. Management explained that, given the nature of its business as a EXAMPLES ON ENVIRONMENTAL, SOCIAL AND city gas distributor, Kunlun Energy has to work with upstream GOVERNANCE ISSUES suppliers, with PetroChina being one of the three large upstream + AutoZone (consumer discretionary). During the period we suppliers. Based on our conversation, we do not have any spoke with the CEO, general counsel and head of investor concerns on this matter, as the pricing is market pricing and in relations (IR) to discuss a range of ESG issues and highlight our line with other city gas players. discussion on labor management issues that follow. We asked management about the nature of Kunlun Energy’s We believe management could move the needle on MSCI’s low relationship with PetroChina Finance. Our specific concern was labor-management rating on the company, and we shared some on the deposit and lending services that it provides to Kunlun best practices. For example, AutoZone could improve disclosures Energy. Management explained that this type of relationship is on activities already underway, like the cadence and results of common practice for large Chinese state-owned enterprises employee engagement surveys, which management said takes (SOEs). Management also noted that this financial subsidiary place every 18 months. And after learning about a board-level relationship is common under the governance of the China quarterly report on employee privacy and data security training, Banking Regulatory Commission nonbanking sector. PetroChina we encouraged management to share the same with MSCI, which Finance is one of the top-ranking nonbanking financial-services could lead to an improved Key Issue Hierarchy score. The providers in China. company shared that its efforts to encourage employee retention included reinvesting a tax benefit into employee compensation for From a lending perspective, management explained that Kunlun tenured employees, which we view positively. Energy borrowed RMB14bn from PetroChina Finance. For approximately one-third of the total loan, the interest rate is at a + Kunlun Energy (Chinese integrated energy company). In 10% discount to bank rates. Based on our conversation, we view October 2020, we met with the CFO and investor relations (IR) at the risk of PetroChina Finance’s relationship with Kunlun Energy Kunlun Energy to discuss a related-party transaction. as low. Kunlun Energy, a city gas distributor in China, is controlled by PetroChina. Kunlun Energy recently announced a related-party transaction with parent company PetroChina, seeking minority shareholder approval. The specific transaction was for Kunlun For Investment Professional use only. Not for inspection by, distribution or quotation to, the general public. SEMIANNUAL COMMENTARY 1 In November 2020, we followed up with IR to discuss an ESG Samsung uses self-assessment, third-party verification and on- questionnaire that we sent to the company as part of our 2020 site auditing to identify risk. Tier-1 suppliers conduct annual self- ESG Engagement Campaign. assessments, and critical suppliers receive on-site audits. The Responsible Business Alliance—an industry coalition dedicated to IR explained that the company currently does not have sufficient corporate social responsibility in global supply chains—audits resources to formulate a formal climate-risk strategy and randomly selected suppliers. All audits are unannounced. oversight mechanism. However, management noted that the company plans to set environmental and social key performance The company is an industry leader with initiatives and systems in targets for 2021, gradually setting mid- to long-term key place to monitor, manage and mitigate risks. In managing its performance targets. suppliers, audit improvement plans must be rectified within three months. The company encourages suppliers to partner with Kunlun Energy has yet to set relevant targets to reduce its smelters certified by the RMAP (Responsible Minerals Assurance greenhouse gas emissions. This work is planned for the future. Process) and requires uncertified smelters in its supply chain to However, based on PetroChina’s environmental goals, Kunlun become certified by RMAP. Energy has set energy and water-related targets. The energy and water-saving work targets for 2020 were to achieve an annual When evaluating the effectiveness of Samsung’s action plans, we energy savings of 6,000 tons of standard coal and a water find high-level on-site compliance but believe that further work is savings of 3,500 cubic meters. required to identify modern slavery risks in its supply chains. For example, KPIs need to be established. Sixty-seven percent of We were pleased that Kunlun Energy has submitted its response 12,814 grievance reports were concerned with labor conditions to questionnaires from CDP and MSCI, leading ESG ratings and and work environment issues, with 99% resolved through research companies. This has resulted in an improved MSCI ESG established channels. rating. IR also noted that the company plans to detail its efforts and results to address climate change, conserve energy and We also believe that further work is required to establish future reduce carbon emissions in its next ESG report. actions and objectives; however, it is encouraging that the company will conduct special inspection assessments for risk We were generally pleased with our conversations with situations identified at suppliers and plans to create a management at Kunlun Energy and look forward to future collaborative platform to handle grievances across supplier engagements with the company. worksites. + Samsung (South Korean multinational conglomerate). We + Suzuki (automobile company). We engaged with IR at Suzuki regularly engage with management at Samsung around ESG to discuss a labor dispute at its Maruti plant that has caused a matters and have developed a modern slavery risk assessment great deal of concern. that maps how the company tackles its complex supply chains. We find that Samsung is moving in the right direction, and our key MSCI has given Suzuki a CCC ESG rating with a concern on findings from our engagement in December 2020 are below. labor management. Notably, the company has experienced labor disputes at its Maruti plant in the past. Since the most recent Samsung has dedicated resources, strong policies and a solid dispute, Maruti started to use more contract workers with poor governance framework in place. There are multiple human rights coverage. We wanted to get an update from Suzuki management and labor policies. A global labor-issue committee meets on the issue. bimonthly and escalates issues (as needed) to the company’s Sustainability Council, led by the company’s CFO. A global IR confirmed that there was an unfortunate past, in which labor director for labor and human rights has been appointed, and there disputes at Maruti Suzuki's (Indian subsidiary of Suzuki Motor are multiple channels to file grievances: online, hotline and via Corporation) Manesar plant caused riots, but that the company employee committee. considered this a criminal case. In order to prevent a recurrence, For Investment Professional use only. Not for inspection by, distribution or quotation to, the general public. 2 SEMIANNUAL COMMENTARY Suzuki reviewed the hiring scheme for part-time workers and employees and management. In terms of communications, Maruti instituted new rules. Suzuki holds meetings periodically between the union and the president, plant managers, human resource managers, and other Management recognizes that the most serious root cause of the managers. Also, the company organizes various events jointly incident was due to a lack of communication between workers with unions, such as the arrangement of plant tours for family and management. Measures to improve this situation have members, sporting events, family day and many other events already been disclosed in Suzuki’s 2019 Corporate Social where all employees participate. Responsibility (CSR) & Environmental Report. Management also explained that, as per statutory requirements, Another action item taken by Suzuki is to build a stable there are independent unions in each plant. All major policy relationship with the labor union at Suzuki. The company has 130 changes affecting workers are discussed with union member companies (manufacturers, non-manufacturers, sales representatives. Such changes are communicated to all the companies) at home and abroad. It is management’s hope that workers directly and through union representatives. those 130 member companies are individually