2020 Annual Review NATWEST GROUP PENSION FUND Engagement Highlights www.hermes-investment.com For professional investors only 2 NatWest Group Pension Fund Welcome to our 2020 Annual Review, which outlines the stewardship work carried out by EOS on our behalf. EOS has worked with companies across the globe to address their key risks, challenges and opportunities, covering environmental, social, governance, strategy, risk and communication matters. Alongside this, EOS has continued to engage with policymakers, regulators and standard-setters to help improve market best practice. NatWest Group Pension Fund 3 NatWest Group Pension Fund’s activity for 2020 4 The EOS approach to engagement 10 Foreword 11 Our engagement plan 12 A guide to engagement terminology 15 A decade of action for the UN SDGs 16 Engaging through a pandemic 19 Environmental highlights Taking the temperature 21 Q&A: Biodiversity and sustainable land use 24 Climate change and fossil fuel financing 26 Q&A: Circular economy 28 Social & ethical highlights Safety first – managing employees in a pandemic 30 Racial equity and ethnic diversity 33 Engaging on human and labour rights 36 Q&A: Indigenous rights and Rio Tinto 38 Q&A: AI ethics and data governance 40 Governance highlights Voting season 2020: virtually as good? 43 Q&A: Revisions to voting policy guidelines 46 Q&A: Board composition and effectiveness 47 Regional public policy highlights 50 Strategy, risk and communication highlights Preparing for future crises 52 Business purpose and long-term strategy 55 Afterword 57 EOS team 58 4 NatWest Group Pension Fund NatWest Group Pension Fund’s activity for 2020 Engagement by region In 2020, we engaged with 274 We engaged with 274 companies companies on 1,193 environmental, over the last year. social, governance, strategy, risk and Global ■ Environmental 24.1% communication issues and objectives. ■ Social and Ethical 20.2% ■ Governance 37.0% Our holistic approach to engagement ■ Strategy, Risk and Communication 18.6% means that we typically engage with companies on more than one topic simultaneously. Emerging & Developed Europe Asia Developing Markets We engaged with 18 companies We engaged with 29 companies We engaged with 56 companies over the last year. over the last year. over the last year. ■ Environmental 33.3% ■ Environmental 12.7% ■ Environmental 26.6% ■ Social and Ethical 22.2% ■ Social and Ethical 21.6% ■ Social and Ethical 14.2% ■ Governance 27.3% ■ Governance 42.2% ■ Governance 36.5% ■ Strategy, Risk and Communication 17.2% ■ Strategy, Risk and Communication 23.5% ■ Strategy, Risk and Communication 22.7% North United Australia & America Kingdom New Zealand We engaged with 146 companies We engaged with 24 companies We engaged with 1 company over the last year. over the last year. over the last year. ■ Environmental 23.4% ■ Environmental 26.2% ■ Governance 100.0% ■ Social and Ethical 21.6% ■ Social and Ethical 22.3% ■ Governance 38.4% ■ Governance 33.0% ■ Strategy, Risk and Communication 16.7% ■ Strategy, Risk and Communication 18.4% NatWest Group Pension Fund 5 Engagement by theme A summary of the 1,193 issues and objectives on which we engaged with companies in 2020 is shown below. Social and Environmental Ethical Environmental topics featured in Social and Ethical topics featured 24.1% of our engagements over in 20.2% of our engagements over the last year. the last year. ■ Climate Change 77.4% ■ Bribery and Corruption 2.5% ■ Forestry and Land Use 3.5% ■ Conduct and Culture 17.8% ■ Pollution and Waste Management 10.4% ■ Diversity 21.2% ■ Supply Chain Management 5.2% ■ Human Capital Management 18.7% ■ Water 3.5% ■ Human Rights 31.1% ■ Labour Rights 6.2% ■ Tax 2.5% Strategy, Risk & Governance Communication Governance topics featured in Strategy, Risk and Communication 37.0% of our engagements over topics featured in 18.6% of our the last year. engagements over the last year. ■ Board Diversity, Skills and Experience 21.5% ■ Audit and Accounting 5.9% ■ Board Independence 10.9% ■ Business Strategy 35.6% ■ Executive Remuneration 48.0% ■ Cyber Security 8.6% ■ Shareholder Protection and Rights 14.0% ■ Integrated Reporting and Other Disclosure 24.8% ■ Succession Planning 5.7% ■ Risk Management 25.2% 6 NatWest Group Pension Fund Engagement methodology and progress in 2020 Our proprietary milestone system allows us to track progress in our engagements relative to the objectives set at the beginning of our interactions with companies. The specific milestones used to measure progress in an engagement vary depending on each concern and its related objective. They can broadly be defined as follows: A Milestone 1 Concern raised with the company at the appropriate level A Milestone 2 The company acknowledges the issue as a serious investor concern A Milestone 3 Development of a credible strategy/Stretching targets set to address the concern A Milestone 4 Implementation of a strategy or measures to address the concern Milestone status of engagement The chart below shows the milestone status of our engagement objectives by theme. Engagement objective status Closed engagement Total (last milestone completed) objectives Theme Engagement Objective Milestone Milestone Milestone Milestone Objectives Discontinued set 1 2 3 4 Environmental 152 9 39 44 31 28 1 Social and ethical 87 3 26 27 21 9 1 Governance 124 1 39 42 26 13 3 Strategy, risk and 75 1 28 25 6 14 1 communication Total engagements 438 14 132 138 84 64 6 Engagement progress in 2020 We made solid progress in delivering engagement objectives across regions and themes. At least one milestone was moved forward for about 50% of our objectives during the year. The following chart describes how much progress has been made in achieving the milestones set for each engagement. Environmental 70 105 No change Social & ethical 47 57 Positive progress (engagement moved Governance forward at least one 109 46 milestone during the year to date) Strategy, risk & communication 33 50 NatWest Group Pension Fund 7 Supporting the UN Sustainable Development Goals The chart below illustrates the number of engagement objectives and issues on which we have engaged in the last year, which we believe are directly linked to an SDG (noting that one objective or issue may directly link to more than one SDG). No Reduced poverty inequalities Zero Sustainable cities Hunger and communities *OTHER Good health Responsible consumption Proportion of issues and well-being and production and objectives engaged in 2020 Quality Climate Education action linking to the SDGs Gender Life equality below water Clean water Life and sanitation on land Affordable and Peace, justice and of the issues and objectives clean energy strong institutions engaged in 2020 were linked to one or more of Decent work and Partnerships for 573 economic growth the goals the SDGs * This represents the proportion of issues and Industry, innovation objectives assigned to the remaining SDGs. and infrastructure Why engage on the SDGs? Milestone progress of SDG-linked engagement objectives Investors and their representatives play a key role in supporting the delivery of the UN SDGs. This could be by creating positive 150 outcomes for society through investments and engagement as the goals recognise the role of the private sector in financing sustainable development. Moreover, the SDGs provide a common framework and language for investors and companies to work 120 towards the achievement of the shared goals, with measurable indicators of progress. They also provide a clear time frame in which change needs to take place, helping to set targets and create a greater sense of urgency, while considering what action 90 is needed from business to achieve sustainable development, beyond the typical incremental improvements and business-as- usual targets. Our engagement with companies encourages them to act 60 responsibly and reduce their negative impacts on society, across their value chains. We are also suggesting changes that could No of milestones completed provide a positive impact. Our view is that the long-term success of business is inextricably linked to achievement of the goals 30 because the SDGs help to create an economic context and society in which businesses can best thrive. 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 SDG Milestone 1 Milestone 2 Milestone 3 Milestone 4 Source: EOS data for 2020 8 NatWest Group Pension Fund Voting overview In 2020, we made voting recommendations on 2,226 resolutions at 170 meetings. At 92 of those meetings, we recommended opposing one or more resolutions, while at two meetings, we recommended abstaining. We recommended voting with management by exception at 19 meetings and supported management on all resolutions at 57 meetings. Global United Global Europe Kingdom We recommended voting against or abstaining on 340 resolutions over the last year. ■ Board structure 50.6% ■ Remuneration 20.9% ■ Shareholder resolution 10.3% ■ Capital structure and dividends 7.1% We made voting recommendations We made voting recommendations We made voting recommendations ■ Amend articles 1.8% at 170 meetings (2,226 resolutions) at 29 meetings (445 resolutions) at 12 meetings (285 resolutions) ■ Audit and accounts 6.5% ■ over the last year. over the last year. over the last year. Other 2.9% ■ Total meetings in favour 33.5% ■ Total meetings in favour 27.6% ■ Total meetings in favour 58.3% ■ Meetings against (or against AND abstain) 54.1% ■ Meetings against (or against AND abstain) 65.5% ■ Meetings against (or against AND abstain) 33.3% ■ Meetings abstained 1.2% ■ Meetings with