2023/06/20

SPARX Asset Management ("SPARX") conducted a self-assessment of its stewardship activities in fiscal 2022 (April 2022-March 2023). The following report covers the results of this assessment.

Principle 1: Institutional investors should formulate and publish a clear policy on fulfilling their stewardship responsibilities.

SPARX created a responsible investment policy to clarify our approach to the subject and posted it to its website. This fiscal year, we created a new responsible investing policy for our listed alternative equities investment strategy and a new stewardship policy for our renewable energy investment strategy.(Link: https://www.sparx.jp/pri.html )
In February 2018, SPARX Group signed the United Nations-backed Principles for Responsible Investment (PRI) to raise awareness across the company of the relationship between corporate activities and environmental, social, and corporate governance issues (ESG), and to reflect this association in our investment activities. This year, as in the previous year, we drafted and presented a transparency report per the format required of PRI signatories.
Furthermore, to promote responsible investing practices across our organization, and to ensure medium- to long-term operational soundness and suitability from the perspective of climate change-related risks and opportunities, SPARX Group's Board of Directors established an ESG Committee. As of March 31, 2021, this Committee consists of SPARX Group's CEO, directors, group executive officers, and the Head of Legal & Compliance, and is chaired by the Group CIO, per the Board's appointment. Moreover, in January 2020, SPARX Group announced its agreement with the recommendations published by the Task Force on Climate-Related Financial Disclosures (TCFD), as part of its active involvement in realizing, through investment, a society in which human beings can coexist with the global environment.

Principle 2: Institutional investors should formulate and publish a clear policy on managing conflicts of interest, as required to fulfill their stewardship responsibilities.

In addition to funds that invest in publicly traded stocks, SPARX manages funds that invest in renewable energy and start-ups. These funds receive investments from external clients, including corporations. As a result, a situation could arise that while a client of one SPARX-managed fund is a publicly traded company, it might become a part of the portfolio of another SPARX-managed fund. In such circumstances, undue consideration of client relationships with such listed companies could result in our inappropriate exercise of voting rights, which could harm the interests of our listed equity fund clients.
Therefore, recognizing the importance of properly managing conflicts of interest, SPARX continued to conduct business this year per our "Rules for Managing Conflicts of Interest" to prevent transactions with conflicts of interest. In addition, when exercising voting rights, we took measures to avoid conflicts of interest for any potentially problematic portfolio companies by deliberating on the votes through the Committee for Managing Conflicts of Interest.

Principle 3: To fulfill their stewardship responsibilities, institutional investors should accurately assess the circumstances of portfolio companies so that these investments can achieve sustainable growth.

Again this year, SPARX has continually promoted research using a bottom-up approach. This year, we spoke with and visited companies (including those that are not portfolio companies) 2126 times. We had discussions with 337 portfolio companies. In addition to referring directly to corporate disclosure information, we also referred to ESG ratings from external information vendors, as we tried to understand the entire picture of companies with low disclosure or unclear disclosed data by asking questions at meetings. We used this information to identify new investment opportunities and avoid potential investment risks.

In order to accurately understand the individual situation of each company and to properly fulfill our Stewardship responsibilities, we conduct company surveys to ascertain the actual situation in light of the 17 Sustainable Development Goals (SDGs). Furthermore, when conducting engagement activities during interviews and conversations with companies, we make sure to understand the content of the dialogue.

Principle 4: Institutional investors should seek to share perspectives with portfolio companies and work to remedy problems through constructive, purposeful engagement.

SPARX has traditionally placed a high value on individual meetings with companies. Our engagement is meant to help companies achieve sustainable growth and improve corporate value. However, as a shareholder, if we have concerns about the management of a company, we may request, through face-to-face discussions, that the company address the issues. During engagement, we are conscious of the need to go beyond merely expressing opinions and concerns to lead to value co-creation with a company.
This year, as in the previous year, we continued our efforts to enhance and improve communication with the companies we research, focusing on engagement from perspectives such as improving IR, increasing ESG disclosure, optimizing financial strategies, and bolstering management systems (please refer to the engagement example below). We also actively communicate with the public by posting articles on our website and social media, while engaging in dialogues with NPOs and speaking at seminars to help address ESG issues from a more multifaceted perspective.

Engagement Examples:

• We conducted a dialogue with Company A, a highly competitive and profitable manufacturer in the global market, and shared with its management the perception that the company's business value was significantly undervalued in the stock market. After our dialogue, the company announced that it would buy back its own shares and abolish its anti-takeover measures, with the aim of improving its return on capital. The company is now seeking to improve its return on capital.
• Company B, a traditional Japanese company, has achieved high operating profit margins by using its credibility, backed by a long track record of business transactions, as a barrier to entry. We have informed the management of Company B that investors are concerned about the fact that Company B has a large number of so-called "strategic shareholdings," the majority of which are Company C shares that have little business relevance and for which no rational reason can be found, and that Company B's overall disclosure of information to investors is very limited. Company B has yet to take concrete actions such as reducing its strategic shareholdings or buying back its own shares. However, Company B's attitude toward the capital market has been improving, as evidenced by the fact that it has held its first investor meeting to explain its financial results, as we had requested in the past.

Principle 5: Institutional investors should have clear policies on publishing their exercise of voting rights and the outcomes of their votes. They should also design policies on exercising voting rights that go beyond merely outlining decision-making criteria and that contribute to sustainable growth in their portfolio companies.

As a general rule, SPARX conducts a fundamental analysis of all its equity holdings, a process that includes interviews before and during the investment period, to understand the entire picture of a company. When exercising voting rights, the fund managers who conduct corporate research and make investment decisions decide personally whether to approve or object to individual proposals. To ensure that SPARX can exercise its voting rights optimally under such a system, we have established basic guidelines for decision-making criteria rather than detailed formal criteria or simply relying on voting rights advisory companies. We have a process in place to allow the fund managers to make voting decisions based on their past research and discussions, the individual circumstances of each company, and a rational examination of the proposals.
This year, SPARX continued to exercise its voting rights based on the individual judgments of fund managers per the above policy. Additionally, when receiving a critical proposal or request from a company, we spoke with it before and after the proposal vote to optimize our decision. We also encouraged the company to more thoroughly consider improvements to its management.
We publish aggregate totals of our voting results for each type of proposal on our website. We previously disclosed to the public the names of companies and the details of individual proposals only if we oppose a company proposal or agree with a shareholder proposal. However, from this fiscal year, for some strategies, we have started disclosing the voting results for all proposals, regardless of our position. We publish our voting guidelines and results on the following website: https://www.sparx.co.jp/vote.html (in Japanese).

Principle 6: Institutional investors should periodically report to their clients and beneficiaries on how they are fulfilling their stewardship responsibilities, including on how they exercise their voting rights.

This year, as same as in the previous year, we published our stewardship responsibility self-assessment and voting results on our website. By submitting our transparency report to the UN-supported Principles for Responsible Investment (PRI), we disseminated information so that a wide range of stakeholders and our clients could review our activities.
We also report on our activities to clients and beneficiaries through written documents and meetings. This year, as in the previous year, we made efforts to respond to the growing number of client disclosure requests by enhancing the content of our disclosures. We have started to prepare reports on the combined portfolio of listed equity strategies per the TCFD format. We have provided Japanese asset owners with reference information to help them consider their own compliance with the Japanese Stewardship Code by explaining our responsible investment and voting policies. Furthermore, we voluntarily prepared an annual report in English to further enhance our disclosures for specific investment strategies.

Principle 7: Institutional investors should be capable of making appropriate decisions about their engagement and stewardship activities with their portfolio companies. These decisions should be based on a deep understanding of the portfolio companies and their business environments to ensure that institutional investors help these companies achieve sustainable growth.

This year, to enhance our organizational ability to execute engagement and stewardship activities with our portfolio companies, we took the initiatives below.

• Our Investment Policy Committee, which serves as an advisory body for the management of client assets, has begun determining Responsible Investment policies, including addressing climate change-related risks and opportunities, and monitoring the status of responsible investment practices. We have initiated our own ESG ratings in internal reports and monitor the list of companies with investment restrictions, greenhouse gas emissions per fund, TCFD endorsement ratios, and ESG risk score coverage by external information vendors. In addition, in the day-to-day activities of our investment managers and analysts, we strive to cultivate ESG-related knowledge through regular attendance at seminars and other events held by various organizations and securities companies. In addition, the SPARX Group's Responsible Investment Committee introduces initiatives from each department within the company and shares information to improve the quality of activities throughout the company.
• We regularly hold news briefings with our overseas offices in Hong Kong and South Korea to understand cross-border ESG trends.
• We also continued our efforts to improve the quality of engagement by exchanging opinions not only between the fund managers but also with other internal and external parties. For some of our investment strategies, we continued last year's initiative to conduct surveys of companies after IR meetings to receive feedback on the quality of our engagement and devise ideas for improvement.
• In order to share and strengthen knowledge on ESG across the Company, we held internal study sessions on ESG themes, including management, and worked to raise the level of knowledge across the SPARX Group through discussions that transcended departmental boundaries.