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No 2. MATERIALITY Yes SIGNIFICANCE ENVIRONMENTAL FINANCIAL INVESTMENT No Yes 3. ENGAGE No Values METRICS/CRITERIA Performance Volatility Credit ratings METRICS/CRITERIA Impact ratios METRICS/CRITERIA Industry Investigations Events

in the first instance, our esg screening procedures help our investment teams to identify those companies in our esg coverage which may have potentially significant adverse environmental impacts. a recent history of environmental events reported by the company or alleged by a third party are useful indicators of potential risks if the management is not responding appropriately to improve the companies’ environmental performance. in strictly environmental or ecological terms, “significant” adverse environmental impacts may be defined by the magnitude or duration of the environmental effects of activities, the sensitivity of the relevant environmental receptor, its reversibility and so on. but these impacts may also be financially material. we have found that those companies for which reports or credible allegations of environmental

damage have been made, or which have been subject to an investigation or fine in relation to their environmental effects, are statistically more likely (p<0.05) to have higher environmental cost ratios, as we describe below. therefore, our initial screening for environmental risk employs three indicators, supplied by gmi ratings:

• whether the company operates in an environmentally sensitive or “high impact” industry; • whether the company has caused or contributed to environmental damage in the last two years;

• and whether the company has been subject to investigations or subject to fine, settlement or conviction as a result of poor environmental practices in the last two years.

companies which meet any of these criteria are candidates for further evaluation and, where appropriate, targeted engagement. the next step in our environmental risk screening procedure is to determine whether the environmental impacts of these companies are material. that is, whether they may give rise to financial consequences which, in turn, could represent a threat to investment performance.

to judge whether this may be the case, the next step in insight’s screening procedure identifies those companies whose “environmental impact ratio” is significantly above its industry peers. this metric, calculated by the specialist research provider trucost, measures each company’s total environmental costs relative to total revenues. through its sophisticated economic modelling, trucost is able to assign a value in monetary terms to the total environmental impacts attributable to the company’s activities, including its supply chain, and relate these to gross revenues. this illustrates the magnitude of the potential financial effect on a company if its environmental externalities are immediately internalised. those companies whose environmental performance may therefore be judged to be poor due to the weak management of significant environmental issues impacts which could have a material financial impact are candidates for careful investment analysis. in summary, this second step in our environmental screening process provides a direct link into the financial and investment analysis by asking the following whether the company’s total environmental costs relative to total revenues are significantly greater than its industry peers.

environmental impacts that increase the likelihood of future default by a company may have a commensurate effect on investment performance. insight’s fixed income credit risk analysts are charged with evaluating environmental risks for those companies placed on our esg watch list as part of the quarterly esg risk review process. this is done in the context of a full appraisal of a company’s creditworthiness and subsequent investment analysis. this will include an assessment of the financial strength and resilience of the company concerned.

the analyst assesses the size, likelihood and timing of potential financial costs or liabilities associated with a company’s environmental impact. the legal, regulatory or policy contexts in which external costs may be internalised are a part of this assessment of materiality and investment significance. a company’s voluntary commitment to reduce its adverse external environmental impacts reduces the likelihood that material impacts will be internalised in the future. those potential impacts that are nevertheless judged not to affect credit risk will be considered non-material and are therefore unlikely to be

significant in the final investment decision.

engagement on environmental management

those companies with potentially material environmental impacts are candidates for engagement. our investment teams are particularly interested in how these risks are being managed by the company and what environmental management practices have been implemented. the specific issues we may wish to address with the management include:

• whether the company’s environmental disclosures and reporting practices meet or exceed best practice; • whether the company utilises an environmental management system for some of all of its operations; • whether the company sought and obtained ISO 14001 certification for some or all of its operations; and • whether the management set targets for future environmental performance.

our environmental indicators supply some answers to these questions, helping our analysts to identify those companies for which environmental management practices may not meet adequate standards. we believe poor environmental management is a source of risk which may not be reflected in the valuation of a company’s securities. this three-stage environmental impact screening procedure enables insight’s analysts to focus their attention on those companies for which their associated environmental impacts could have a deleterious effect on investment performance. those companies whose environmental impacts pose a significant threat to clients’ investment performance are prioritised in the esg review process.

environmental management as a risK indicator

insight regards the implementation of an environmental management system (ems) certified to the iso14001 standard as a useful indicator of the quality of management with respect to a company’s environmental impact. implementation of an ems has become standard practice for companies operating in environmentally sensitive industries. the iso1400 family of international standards addresses many aspects of environmental management. they consist of tools with which companies can identify and control their environmental impact and constantly improve their environmental performance. the iso14001 standard sets out the features of an environmental management system, and a framework for its effective implementation. since certification requires independent audit and verification, it can offer some reassurance that the ems has been properly implemented. according to the international standards organisation, it can “provide assurance to company management and employees as well as external stakeholders that environmental impact is being measured and improved.” some 267,000 organisations in over 158 countries have achieved accredited certification.

during 2013 the iso consulted with industries that use environmental management standards on possible revisions to iso14001. insight welcomes the proposed changes which it believes will further strengthen certification as an indicator of a company’s commitment to improving its environmental performance and risk management. they are likely to include strengthening links with business strategy; engagement with stakeholders; a greater emphasis on managing risks from a changing environment; and a focus on the entire value chain, including the impacts of suppliers. overall, these improvements may bring an ems into a more central role as part of companies’ strategy for sustainable value creation. environmental risK screening

insight screened its entire fixed income esg universe for environmental risks twice during 2013, first in Q1 and again in Q3. we identified companies that, according to gmi ratings, operate in environmentally sensitive industries and had either been involved in a serious environmental event within the last three years, or had been subject to regulatory or criminal

investigation in connection to their environmental practices. these populated our initial environmental impact list of companies and were monitored over the course of the year alongside those on our carbon risk and water risk lists (see below). when we repeated this exercise in Q3 the number of companies which met the criteria for significant environmental impact had increased to 70 companies from an expanded coverage universe of 520 companies. of these, we found that 15 were potentially material by virtue of elevated impact ratios in Q1, and this number had risen to 28 by Q3.

all three environmental risk lists are annexed to the main esg watch list. in most cases, companies which feature on an environmental watch list already meet the criteria for admission on to the main esg watch list and, as such, are subject to the esg review process. our separate environmental risk screening tools assists our investment teams to pinpoint the specific risk factors which may affect long-term investment performance. whether or not a company is identified for further risk evaluation in the quarterly esg review process, its inclusion on an environmental risk list creates the basis for dialogue on environmental issues during our regular rounds of meetings with company management. we describe below the results from the environmental screening exercise undertaken in Q3 2013.

Step 1. Environmental impacts and event risk

companies with elevated impact ratios and a history of adverse environmental impacts are of potential interest from an investment perspective. Of 258 companies within our fixed income ESG coverage that operate in environmentally sensitive industries, 70 (27%) were flagged for at least one environmental “impact event” in the previous two years (42 excluding regulatory or criminal investigations).

Step 2. Impact ratios and financial materiality

although only nine of these companies, all operating in the utilities or basic materials industries, had an overall impact ratio significantly higher than their peers (see table 1), a further six had elevated indirect impacts within their supply chains. Finally, an additional 13 had elevated carbon, water or waste-related costs relative to their revenues (measured as their