Deutsche Asset Management

As a fiduciary partner, at Deutsche AM we believe that responsible investing is in our clients best interests. Our approach to ESG issues is guided by our Responsible Investment (RI) Statement. The governance structure strengthened in 2017 includes a new position of Chief Investment Officer (CIO) for Responsible Investments who ensures that ESG issues are integrated into our investment processes in all asset classes across our Active, Passive, and Alternatives investment decisions and that we support the growth of dedicated ESG products and solutions.

To support our internal and external stakeholders in their investment decisions, we published a series of research papers on controversial topics and major trends in ESG investments. From September 27 to 28, 2017, we hosted our first global ESG Summit in Berlin, Germany, which welcomed around 300 participants, including more than 200 Deutsche AM clients. We were able to demonstrate the benefits of growing opportunities in responsible investments.

We were among the main sponsors of the Principles of Responsible Investment (PRI) in Person conference in September in Berlin, Germany. We also became signatories to the Climate Action 100+ initiative of investors engaging with the world’s largest greenhouse gas emitters to improve governance on climate change risks, curb emissions, and strengthen climate-related financial disclosures.

The increasing number of international stewardship codes requires us to act as an active shareholder and enable our clients and our company to comply with growing supervisory regulations. Therefore, we continuously expand our proxy voting, corporate engagement activities, and the number of annual general meetings we attend.

To support ESG integration across our entire investment platform, we continuously update our ESG database (the ESG Engine)- and methodologies for comprehensive analysis of ESG information. We provided training to our investment professionals across all divisions in Active, Passive, and Alternatives on the assessment of ESG risks and opportunities.

Governance and Transparency

A consistent and strong management organization is an essential requirement for effective integration of ESG factors into investment and business processes. To this end, we have established a Global Leadership Team for Responsible Investments led by a member of the Deutsche AM Global Executive Committee. Other members of the committee include the Global Head of Responsible Investing, Global Client Group, and our CIO for Responsible Investments. The latter heads the CIO office for responsible investments, alongside ESG research and corporate governance, including proxy voting, data-base and the sustainability office.

Deutsche AM Investment GmbH signed the UN Principles for Responsible Investment (PRI) ten years ago, and our ESG governance principles are based on international standards and guidelines, such as the UN Global Compact, the Ceres Principles and the OECD Guidelines for Multinational Enterprises.

The Sustainability Office’s key responsibilities are to:

• develop internal ESG governance structures reflecting local and division-specific regulatory requirements,
• govern the reputational risk and the New Product Approval (NPA) processes,
• prepare the mandatory transparency reports to inform all stakeholders of our ESG activities,
• engage with NGOs and other external parties, and
• coordinate ESG-related global memberships and projects within Deutsche AM.

Our global RI Statement is the basis for our ESG governance, including policies and guidelines. As a global asset manager, we have to adhere to regional and jurisdictional differences in regulation and have therefore developed divisional and regional guidelines (e.g. ESG integration policy for the Active investment division and ESG objectives for real estate investments).

We provide transparency on our ESG activities and integration improvements, for example via the PRI report and continuously update and improve our Deutsche AM ESG webpage.

ESG Research

The ESG thematic research team continued to publish responsible investing reports in 2017, including the second issue of the Sustainable Finance Report.

In cooperation with Four Twenty Seven, a specialist consultant in climate information, we advocate more accurate monitoring and handling of the physical effects of climate change on investment portfolios. Together, we published a research paper that identified and categorized the location, activity, and business sensitivity of facilities or companies to climate hazards, such as heat waves, floods, and cyclones. Our aim is to assess the implications of these climate events for individual companies in our portfolios.

Contribution to the Climate Change Debate

Our ESG analysis contributes to international climate debate from an investment perspective. In 2017, this included:

• the Head of Deutsche AM calling for the investment industry to move beyond carbon footprinting and towards improved disclosure of physical climate change risks at the “PRI in Person” conference in Berlin, Germany;
• speeches at the UN Climate Change Summit (COP23) in Bonn, Germany;
• contributions to the political debate on energy efficiency in buildings through the Institutional Investors Group on Climate Change (IIGCC) and through meetings with policy-makers; and
• participation in the Corporate Real Estate working group of the UK Government’s Green Finance Taskforce.

Corporate Governance

Active Shareholders – Ownership Obligations

In 2017, we strengthened the dialogue with companies in our portfolios and participated in national and international working groups and networks. For example, for our funds domiciled in Europe, we approached our investee companies with an engagement letter outlining our governance expectations and our updated Corporate Governance & Proxy Voting Policy.

Stricter Governance Expectations

Also in 2017, we updated our Corporate Governance & Proxy Voting Policy as a structured approach to company engagement and voting guidelines. For example, we expect:

• sufficiently independent, diverse, experienced and well-balanced Boards and committees;
• permanent disclosure of relevant information on Board members;
• appropriate, transparent, and comprehensible executive compensation with clear qualitative and quantitative key performance indicators, relevant and adequate bonus-malus mechanisms (incl. clawback), and reasonable deferral periods and
• enhanced transparency by auditors (incl. the lead audit partner), including fees and rotation periods.

In order to achieve sustainable investment, we emphasize social and environmental practices and analyze compliance with relevant international frameworks.

As a basis for a constructive dialogue with companies on environmental and social issues, our portfolio managers and research analysts regularly use estimates provided by the ESG Engine, as well as topics addressed by NGOs.

Proxy Voting Season 2017

In 2017, we voted at more than 750 general and special meetings in 42 countries for our funds domiciled in Europe. We also re-launched local websites (dws.de and dws.lu), to display our voting decisions and statistics for our retail funds, at company and fund level. In accordance with US regulatory requirements, we exercise our proxy voting rights for locally domiciled mutual funds.

In 2017, we initiated harmonization efforts on processes and policies with several of our entities, complying with all regulatory guidelines as a minimum.

Thought Leadership in Corporate Governance

With our various activities in relevant working groups, policy bodies, networks, and commissions, we aim to be a thought leader in corporate governance and seek to actively shape domestic and global corporate governance developments for our investors.

We took part in the consultation centered on the changes of the German Corporate Governance Code and the revision of the European Fund and Asset Management Association (EFAMA) Code on External Governance, a reference document for both European regulators and asset managers. As a member of the German Association for Financial Analysis and Asset Management (Deutsche Vereinigung für Finanzanalyse und Asset Management e.V. [DVFA]) Corporate Governance Commission, we promote the DVFA Scorecard on Corporate Governance as a measure of governance quality in Germany.

In connection with the Shareholders’ Rights Directive II (SRDII), we held discussions that facilitated the launch of the European Commission Expert Group on the technical aspects of corporate governance processes. In our trustee role, we regard proxy voting as integral to our fiduciary duty. Therefore, we support the reduction of the complexity in the voting chain and support clear accountabilities for custodians and other service providers. We are now a full member of the International Corporate Governance Network (ICGN).

Governance Engagement

In 2017, we talked to over 71 companies during 81 governance engagements for our funds domiciled in Europe, a significant increase on the previous year. We noted that more and more chairpersons of Boards of Directors seek dialogue around issues such as executive remuneration, Board composition, succession planning, and shareholder rights.

We attended several AGMs in person and also voiced our criticism, particularly concerning shortcomings in governance associated with strategic mergers and acquisitions (M&A) transactions.

For greater transparency, we published our first Proxy Voting and Governance Engagement Report, and aim to provide the second volume in Q1 2018.

ESG Engine

Our ESG Engine and solutions team is responsible for maintaining and improving our ESG database. It is responsible for ESG methodology, algorithms, and data. The ESG Engine consolidates and produces data, enabling ESG analysis that is data-driven. Seven leading ESG data vendors (Ethix, MSCI, oekom, RepRisk, Sigwatch, Sustainalytics, and TruCost) provide data to the database.

The structured ESG information is embedded within portfolio management, supporting our due diligence process and enabling us to offer clients bespoke ESG solutions based on criteria agreed with clients.

Our ESG framework is built on six pillars:

• Exclusion screening for companies that do not meet ESG criteria. In 2017, we enabled clients to screen for fossil fuel and coal activity by applying a more sophisticated screening methodology that flags environmental improvements that could offset negative legacies.
• Standards-based screening focused on human rights abuses, child/forced labor, health and safety, environmental impact, and business ethics.
• Corporate best-in-class ratings that seek to identify leaders and laggards with the peer group in regards to ESG issues, as set by ESG ratings agencies. These ratings provide a robust and reliable, 360-degree assessment of corporations based on a broad range of ESG indicators —-from diversity of management to environmentally-friendly products, health care, and safety.
• Environmental risks and opportunities, including carbon. In 2017, we presented our carbon footprint report, which incorporates global reporting standards and allows our clients to monitor their carbon balances and implement programs to reduce their carbon footprint.
• ESG Engine assessment of whether a fixed income instrument is a green bond as defined by the Green Bond Principles.
• Screening based on sovereign standards to gauge responsible investments in around 200 sovereign nations.

In 2017, we consolidated our ESG Engine capacity further by rolling it out globally and integrating it within different corporate functions, such as the client reporting. We continue to develop the ESG methodology, especially in regards to carbon and climate risk sensitivity, opportunities from impact-investing, and the UN’s Sustainable Development Goals (SDGs), integrating them within the ESG Engine.

ESG Integration

Active

In 2017, our Active portfolio management teams were responsible for € 9.6 billion of ESG assets under management (AuM) and for € 513 billion of total AuM. We appointed a Head of ESG Integration in Active portfolio management, with responsibility for further ESG integration in all management classes. Additionally, a global ESG “gatekeeper” structure now exists across all our investment teams to ensure full commitment to the different steps of the investment process.

We tightened our internal ESG Integration Policy for Active portfolio managers – starting by integrating ESG topics into investment guidelines in reporting. All ESG information provided by the ESG Engine is now fully integrated into our portfolio management system. Our funds managers consider all available information, which involves the identification of relevant sustainability and ESG topics and the assessment of their implications on the risk return profile. The outcome is explained in the research note, considered in the valuation, as well as in the investment recommendation. If additional information is needed, an engagement is initiated and coordinated by our Corporate Governance Center in partnership with research analysts and portfolio managers.

Portfolio managers are expected to be aware of any exposure to critical ESG issues. They can screen the portfolio for ESG issues (such as carbon ratings and controversial sectors), and receive a ESG fund score. In 2017, we started to standardize ESG reporting, thereby improving transparency on the ESG quality of our funds.

In order to engage our investment experts with ESG issues, we ran mandatory internal trainings for all active investment experts, including the European Federation of Financial Analysts Societies (EFFAS) ESG Certification Program.

Passive

In 2017, our Passive portfolio management teams were responsible for € 559 million of ESG AuM and for € 115 billion AuM. During the year, they achieved two major milestones: the implementation of proxy voting for applicable exchange traded funds (ETFs), supported by the Corporate Governance Centre; and expanding availability of the ESG Engine to portfolio managers helping to automated investment processes.

Alternatives

The Alternatives business continued to expand its initiatives to integrate ESG into investment processes across the various asset classes. In 2017, the Alternatives portfolio management teams were responsible for € 702 million of ESG AuM (excl. our sustainable investments funds as well as individual real estate and infrastructure assets) and for € 71 billion total AuM.

Real Estate

Our real estate investments continue to position ESG as integral to investment strategies. At the core of the approach is our goal to preserve and enhance risk-adjusted returns and to reduce environmental risk, improve asset efficiency, and deliver high-quality spaces to tenants.

This year, we have continued our efforts to execute a systematic sustainability plan focused on collecting and analyzing data on the properties, using the data to improve the efficiency and quality of our properties and to set targets for energy improvement at a property and regional level.

We managed € 9.4 billion in properties globally with green label designations (incl. Leadership in energy and Environmental Design [LEED]; Building Research Establishment Environmental Assessment Methodology [BREEAM]; ENERGY STAR, a US-government-backed label for energy efficiency). Moreover, we benchmarked and tracked 5,1 million square meters of the portfolio in terms of energy and carbon data. Also, we have invested US$ 1.4 million in energy efficiency projects in the US (799,692 square meters), garnering a project-level return on cost of 31% for the year (measurement period: Oct. 1, 2016 to Sept. 30, 2017).

In order to provide transparency to our investors, we reported on seven of our largest real estate funds through the Global Real Estate Sustainability Benchmark (GRESB), which provides an independent assessment of portfolios and funds using a peer-based approach and scoring based on several ESG metrics. In 2017, our seven funds (worth € 23.7 billion of AuM), achieved Green Star recognition through the GRESB assessment.

Infrastructure

Within infrastructure business, ESG is incorporated into the investment framework of the business. During due diligence, ESG considerations are incorporated into decisions made regarding a potential acquisition. During the holding period, Deutsche AM infrastructure monitors ESG attributes of the investments through quarterly reporting of key performance indicators, discussion at Board meetings, and integration of those issues into business plans.

The infrastructure business also places emphasis on reporting. We create an annual Sustainable and Responsible Investment (SRI) report for investors in our Pan-European Infrastructure Fund (PEIF) and Pan-European Infrastructure Fund II (PEIF II), which address issues such as health and safety in the fund’s underlying investments.

The infrastructure business also manages a portfolio of € 407 million in renewable assets, both in debt and equity investments, including solar, wind and waste-to-energy.

Sustainable Investment Funds

Sustainable Investments (SI) operates investment initiatives within the Alternatives division that combines positive and stable financial returns with measurable economic, social and environmental outcomes (“triple bottom line”). Building on the UN’s Sustainable Development Goals (SDGs), each fund positively contributes directly or indirectly.

In 2017, SI managed seven sustainable and impact funds with a combined volume of € 355 million.

Our extensive management of sustainable and impact funds covers energy (clean energy, energy storage, energy usage), environment (food/agriculture, waste, water), microfinance, employment/education, and housing. These funds achieve “triple bottom line” benefits, with financial returns alongside positive environmental and/or social outcomes.

We track and report on each SI investment funds based on the social and/or environmental performance of the investees. The indicators are sector-specific and monitored using fund-specific tools.

For our renewable energy, energy efficiency, and microfinance investment funds, we work with greenstem™ to monitor impact. At the same time, portfolio managers have visibility of the overall impact of the fund. In 2017, the European Energy Efficiency Fund (EEEF) made accumulated savings of 292,926 metric tons of CO₂e and 203,252 MWh of primary energy (at Q3 2017).

For the first time in 2017, we published externally–verified impact results for the SI-advised African agriculture fund (Africa Agriculture and Trade Investment Fund). Progress along defined indicators (e.g. improvement in living and working conditions, investee company outreach to smallholder farmers) is tracked and summarized in the fund’s annual report (www.aatif.lu).

Green Climate Fund

Deutsche Bank was the first commercial global financial institution to  be accredited to act as an implementing entity for the Green Climate Fund. The Green Climate Fund was established by the UN climate accord to combat climate change and its effects. The accreditation of Deutsche Bank was initiated by the Sustainable Investments team, which is part of Deutsche AM. One of the first projects approved by the Green Climate Fund is to support setting up an investment fund targeting clean electrification projects in five African countries. The fund targets a size of US$ 500 million out of which the Green Climate Fund has approved US$ 80 million.

ESG and Sustainable Assets under Management

By the end of 2017, we reported € 20 billion of ESG AuM (2017: € 10.6 billion of ESG and sustainable AuM and € 9.4 billion of real estate investments in certified green-labeled buildings) and managed assets with a total volume of € 700 billion (as of Dec. 31, 2017).

We follow industry standards and guidelines in classifying ESG AuM. Through regional organizations such as European Sustainable Investment Forum (EuroSIF), US Forum for Sustainable and Responsible Investment (USSIF) and UK Sustainable Investment and Finance Association (UKSIF), investor reporting to the Global Sustainable Investment Association (GSIA) has become a global standard for categorizing ESG assets, and we follow its methodology.

While we are enhancing the level of ESG integration across our entire investment platform, the following table lists those assets that are managed under a dedicated ESG strategy.

ESG Retail Funds

To ensure a consistent approach in classifiying our retail funds as ESG, we established minimum ESG standards (MESGS) for all our Active ESG retail funds in 2017. The MESGS are built on the six pillars of ESG and apply market-common exclusions on controversial sectors, as well as violations of the UN Global Compact. They implement best-in-class methodologies, including the assessment of carbon risks.