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    Investment Stewardship & Proxy Voting 2017 Annual Report Invesco’s commitment to responsible investing


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    Contents 03 Introduction from Martin L. Flanagan, President and CEO, Invesco Ltd. 04 Responsible investment overview 06 Invesco’s investment capabilities 08 Responsible investment 09 Our philosophy 10 Governance and oversight 12 Stewardship and corporate responsibility 14 Thought leadership 16 Our leading ESG strategies 18 Invesco Real Estate – US Direct Properties 19 Invesco Quantitative Strategies 20 Invesco Fixed Income 21 Invesco Fixed Income – Bank loans 22 Invesco Japan – Japanese Equities 23 Invesco Global Smaller Companies strategies 24 Invesco Perpetual 26 Invesco Unit Investment Trusts 27 Our leading ESG strategies 28 Proxy voting 30 Active ownership 31 Proxy voting 32 Our global footprint 34 ESG shareholder proposals 36 Engagement 38 ESG case studies 40 Environmental – Integrating ESG into the investment management process 41 Environmental – Supporting shareholder issues 42 Environmental/Social – Incorporating ESG into an investment decision 43 Social – Service provider engagement 44 Social – Proxy voting against management 45 Governance – Incorporating ESG into an investment decision 46 Governance – Letter writing campaign 47 Governance – Proxy voting against management 48 Governance – Proxy voting against management 49 Governance – Proxy voting against management 50 Our ESG journey


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    Invesco’s commitment to sound investment stewardship Dear Investor, Invesco is committed to delivering an investment experience that helps people get more out of life. A key part of this effort is providing strong, long-term investment performance to our clients around the globe while meeting our fiduciary obligations and ensuring a sustainable environment for future generations. Every day we hear from clients expressing their desire to work with a firm that is committed to responsible investing. We believe that investing responsibly by incorporating sound environmental, social and governance (ESG) practices into activities across our firm can positively impact the value Martin L. Flanagan we provide to clients as well as the value we deliver to shareholders. President and CEO, Invesco Ltd. At the same time, we believe strongly that integrating ESG into our investment decisions shouldn’t compromise the results we deliver to clients. We view our commitment to integrating ESG as an additional layer of due diligence that reinforces our long-term approach to investing, which we believe is in the best interest of clients and the markets. Our clients in Europe have a long-standing expectation of asset managers to utilise ESG, and we are seeing growing interest across the Americas and Asia Pacific. Invesco is committed to meeting the specialised and diverse needs of these clients. As an example, we’ve been actively integrating ESG into our investment strategies in Europe for more than 15 years. In Asia, we’ve provided ESG training to our institutional clients on responsible investment practices and requirements for asset owners working in partnership with asset managers. Over the past year, we’ve worked to promote and advocate responsible investing in industry forums, including appointments to the UNPRI advisory committee on ESG Engagements, the United Nations Sustainable Development Goals working group and, most recently, the advisory board for deep data delivery standards, which promotes effective vendor due diligence for ESG efforts. We adhere to the UK Stewardship Code at Tier 1 level and are a signatory to the Japan Stewardship Code. Our focus on responsible investing helped drive a 21% growth in our ESG assets under management, which increased US$11bn, to more than US$65bn (as of 31 December 2017). We’ve also been a proud signatory of the United Nations Principles of Responsible Investment (PRI) for 4 years, and have earned high ratings on the organisation’s six principles for ESG practices. This report highlights our commitment to responsible investing and details our ESG practices. We invite you to learn more about Invesco’s dedication to meeting client needs and our responsible investing philosophy, practices and approach in the pages of this report. Regards, Martin L. Flanagan President and CEO, Invesco Ltd. 03


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    Responsible investment overview We believe that the ESG practices of company management Distribution of ESG AUM by ESG strategy (%)1 impact the long-term performance of a company’s stock. Full ESG Integration 68.9 As active, long-term investors, we seek to encourage Negative/exclusionary screening 17.5 the companies in which we invest to adopt best-in-class Positive/best-in-class screening 8.2 Sector/values-based exclusion 3.2 ESG practices. Invesco has demonstrated leadership and Thematic investing 2.2 commitment to responsible investing with a variety of capabilities made available across the investment teams. Our US$65.6bn1 in sustainable investments covers a range of ESG strategies including the following approaches: – Negative/exclusionary screening – Sector/values based exclusion – Norms-based screening – Positive/best-in-class screening – Thematic investing – Active ownership, proxy voting and engagement – Full ESG integration 04


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    Invesco ESG capabilities Distribution of ESG AUM by asset class (%)1 Alternatives 70.7 9 Equity Fixed Income Balance 20.0 8.3 1.0 Investment centres1 15 Investment teams1 US$65.6bn AUM in sustainable investments1 21% Increase in ESG AUM year-over-year2 43% Increase in PRI assessment score from 20153 A+ PRI rating for Strategy & Governance3 ESG leader Among brokers and asset managers4 1 US$65.6bn as of 31 December 2017, represents 7.0% of Invesco's total assets under management. 2 US$54.0bn as of 31 December 2016, represents 6.6% of Invesco's total assets under management. 3 2017 Assessment Report for Invesco Ltd., PRI. 4 Ranked 3rd among 20 brokers and asset managers in North America with top 4 considered ESG leaders. 05


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    Invesco‘s investment capabilities Invesco is an independent investment management firm dedicated to delivering an investment experience that helps people get more out of life. We offer specialised investment teams managing more than US$938bn1 in assets across a comprehensive range of asset classes, investment styles and geographies. With an on-the- ground presence in more than 25 countries and nearly 7,000 employees, our single focus is to help clients across the globe achieve their investment objectives. Our global focus Invesco Asia-Pacific Invesco Canada Invesco Fixed Income – Asia ex-Japan – Trimark Investments – Global liquidity – Greater China – Canadian, regional, – Stable value 7,000 – Japan – Australia – India sector and global equity – Canadian and global fixed income – Global and US broad fixed income – Global alternatives and Employees focused on client needs1 – Balanced portfolios bank loans Locations Beijing, Hong Kong, Location Locations Melbourne, Shenzhen, Toronto, Vancouver Atlanta, Chicago, Hong Kong, 25 Singapore, Sydney, Taipei, Tokyo, Mumbai London, Louisville, New York, Palm Harbor, FL, San Diego, Tokyo, Toronto Countries where we have on-the-ground presence1 Invesco PowerShares Invesco Private Capital Invesco Quantitative Index-based ETFs and ETNs – Private equity funds Strategies US$938bn and actively managed ETFs – Domestic and international equity of funds – Customised portfolios – US, global, regional and emerging equity – Long/short strategies AUM – with US$739bn in active strategies – Taxable and tax-free Locations – Active low volatility and US$199bn in passive strategies1 fixed income London, New York, – Balanced solutions – Commodities and San Francisco currencies Locations Boston, Frankfurt, New York, Location Tokyo Chicago 1 Source: Invesco as of 31 December 2017. 06


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    Invesco Fundamental Invesco Global Asset Invesco Global Core Invesco Perpetual Equities Allocation Strategies – Global and regional – US growth equity – Global macro – Emerging markets equities, including UK, – US value equity – Risk parity – International and global European, US, Asian, – International and global – Commodities equity Japanese and emerging growth equity – Active balanced solutions – US equity markets – Sector equity – Multi asset – Balanced portfolios Locations Locations – Fixed income Atlanta, Frankfurt Atlanta, San Francisco Locations Locations Austin, Houston, Henley, UK San Francisco Invesco Real Estate Invesco Unit Investment Invesco Private Capital – Global direct real estate Trusts – Private equity: Contrarian investing – Equity trusts buyouts, distressed and – Global public real estate – Closed-end trusts special situations investing – Tax-free fixed-income trusts Locations Locations – Taxable fixed-income Beijing, New York, Tokyo1 Atlanta, Beijing, Dallas, Hong trusts 1 Kong, London, Luxembourg, Invesco Private Capital Madrid, Milan Munich, New Location joint venture. York, Newport Beach, Paris, Chicago Prague, San Francisco, Seoul, Shanghai, Singapore, Sydney, Tokyo, Warsaw Source: www.invesco.com 07


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    Responsible investment Client focused, investor driven Invesco’s approach to responsible Centralised support – decentralised Our efforts focus on ESG and decisions active ownership investment (RI) can be best 1. Deliver and equip investment teams categorised in three ways. with a best-in-class support platform Invesco’s investment capabilities We are: of tools and research ESG integrative strategies are available 2. Launch awareness and training on through 9 investment centres and – Authentic core trends in the ESG space 15 investment teams including equity, – Active owners 3. Lead with authenticity in thought alternatives, fixed income, balanced – Trusted partners leadership by promoting our Investor assets, direct real estate, quantitative First approach strategies and ETFs. Invesco has been implementing In 2017, Invesco secured an A+ rating ESG and proxy voting ESG strategies for over 30 from the UNPRI in Strategy & Governance, In 2016, we expanded our global was recognised as an ESG leader, and framework for proxy governance, years and we have a grassroots was named a finalist for Chief Investment and responsible investment. Invesco investor-led, investor-driven Officer Magazine's inaugural industry US, PowerShares, Senior Secured approach to ESG integration innovation award for ESG. Management, Canada, Perpetual, Quantitative Strategies, Australia and and active ownership. With more than US$65bn1 in ESG/ Japan each fully adopted the global proxy Sustainable assets managed across our voting policy, and Invesco’s proxy voting platform, Invesco can be a trusted partner platform was rolled out for use in Asia in the responsible investment space, including Tokyo and Hong Kong. meeting the growing client demand for ESG while striving to provide strong The Global ESG Risk Repository is Invesco's returns for our clients. ESG knowledge engine and was built to comprise ESG reports and presentations, We are RI industry focused and participate information on Invesco’s ESG capabilities, in key advocacy roles in this space. We corporate stewardship, ESG fund scores have a global RI team represented by and oversight, ESG industry information, ESG analysts and governance specialists ESG issuer and industry ratings, and the located in Europe-Middle East, Asia-Pacific ESG watchlist report. and North America. Corporate social responsibility Ensures we are good stewards of the environment, value our people and their diverse perspectives, and give back to our communities. Within this report, you will learn more about Invesco’s ESG leading strategies and view our global voting results. In addition, we showcase key examples of demonstrated active ownership and provide case studies of responsible investment at work at Invesco. Bonnie Saynay Global Head of Responsible Investment 1 As of 31 December 2017. 08


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    Our philosophy We are not just shareholders, we are business owners Invesco believes that our response to environmental, Authentic approaches – Managing ESG strategies for over 30 years social and governance activities can positively – Promoting transparency in investment and affect the value we provide to our clients over corporate stewardship the long term. – Strong ESG capabilities throughout our platform in 9 investment centres globally – Thought leadership that is investment driven Consistent with Invesco’s purpose of delivering – Signatory to the PRI, UK Stewardship Code and an investment experience that helps people get Japan Stewardship Code – Dedicated team of nine Responsible Investment more out of life, Invesco’s ESG investing seeks staff across three regions to generate both financial and sustainable value – A+ rated by PRI for our clients. This type of investing can allow Active owners investors to align personal values with their own – Robust portfolio company engagement life goals. – Demonstrable case studies – Investor-led, investor-driven proxy voting approach – Active letter writing campaigns Invesco supports the United Nation's Principles – Proprietary voting platform of Responsible Investment (PRI) and our – Advisory and industry advocacy roles in ESG commitment to investment stewardship means Trusted partners that we incorporate environmental, social – Broad platform of investment expertise in listed and governance approaches into decisions equity, fixed income and alternatives throughout the investment process. – Bespoke solutions and commercially available strategies – Leverages multiple ESG providers and delivers proprietary overlays to ESG Decentralised ESG model, with grassroots investor-led, investor-driven approach. Our 'Investor First' approach to responsible investment: Four ‘C’s enable broad execution1 Commitment Capabilities Construction Collaboration – Dedicated team – Full ESG integration – Tools – Active ownership – Global providers – Thematic investing – Benchmarks – Proxy voting – Senior leadership oversight – Positive/best-in-class – Ratings – Fundamental research – PRI Signatory screening – Research – Issuer engagement – UK Stewardship Code – Norms-based screening – Overlay – Thought leadership – Japan Stewardship Code – Sector/Socially Responsible – Screening – Advisory roles Investment values-based – Advocacy exclusion – Negative/exclusionary screening – Controversial weapons exclusion 09


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    Governance and oversight Corporate Responsibility Committee Invesco is committed to adopting and implementing The Corporate Responsibility Committee's two main objectives are: responsible investment practices in a manner that is consistent with our fiduciary responsibilities to clients. 1. Investment stewardship Our commitment to responsible investment is demonstrated by our Responsible investment is further governed by the capabilities that are actively engaged Corporate Responsibility Committee, which develops and in incorporating ESG practices monitors a disciplined approach to Invesco’s investment across all areas of our firm. Our ESG approach is rooted in our investment stewardship’s policies, programs, and strategies strategies, products, proxy voting, to strengthen the messages we deliver to clients, active ownership, engagement and regulators, shareholders and employees. other oversight practices to ensure we are meeting the highest levels of fiduciary and corporate responsibility. A formalised structure for governance and oversight has been designed to oversee all related sustainability 2. Corporate social responsibility (CSR) Our CSR efforts are motivated by initiatives across the firm and provide strategic direction. the belief that doing what’s right for Invesco’s CEO, Martin L. Flanagan, heads the Corporate the environment, our people and Responsibility Committee with different levels of the communities helps us deliver the best possible experience to clients. executive sponsorship and oversight on the activities We uphold responsible investment conducted by five dedicated work streams. standards, are good stewards of the environment, celebrate diversity of thought from our colleagues, and give back to our communities. 10


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    Corporate Responsibility Committee Formalising our governance and oversight: – 5 dedicated workstreams – Executive sponsorship and oversight – Formalised structure for governance and oversight – Semi-annual meetings summarise key activities across workstreams and identify significant platform opportunities Martin L. Flanagan Chief Executive Officer Loren Starr Greg McGreevey Andrew Schlossberg Sponsor SMD, Sponsor SMD, Sponsor SMD, CFO Investments EMEA Investment and Corporate Stewardship Bonnie Saynay/Denise Harrison Co-Chairs Corporate Responsibility Committee Global Investment Council Investment Corporate social Financial disclosures/ Messaging/Distribution Product strategy Stewardship responsibility accounting strategy Executive Sponsor Executive Sponsor Executive Sponsor Executive Sponsor Executive Sponsor – Responsible – People and diversity – SASB (Sustainability – Thought leadership – Concept investing/ESG – Community relations Accounting – Whitepapers – Pipeline – ESG PM model – Environmental Standards Board) – Core ESG message – Production – PRI reporting – TCFD (Task force – ESG sponsorships – Training – Human capital on Climate-related – Social media – Due diligence development Financial Disclosures) – Panel discussions – Client engagement – GRI standards – Invesco proxy filings – ESG events – Proxy voting – Stewardship codes – Advisory roles – Global policies Legal and Compliance Executive Sponsor – NGO engagement – Activists – Policy review and regulatory trends 11


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    Stewardship and corporate responsibility Overview of Invesco’s capabilities We believe in investing responsibly by incorporating sound environmental, social and governance practices into activities across our Resources1 Research firm: This ensures that we 9 Responsible Investment staff across three Invesco leverages multiple ESG vendors: are doing what’s right for regions with 14 years’ average experience. ISS, GL, IVIS, Ethix, Vigeo Eiris, Morningstar, Nikko Research Centre, our clients as well as our Works in close coordination with the 9 MSCI and Sustainalytics.4 shareholders, employees and member Global Proxy Services team. the communities we serve. Providing deep ESG research: Local governance support staff of 16. governance services, proxy research, business involvement screening, A dedicated IT team of 3 members support controversial weapons research, the Invesco proxy portal. engagement services, carbon metrics, fund ratings, ESG research and ratings. Delivering ESG data to our global network of more than 700 investment professionals.1 Identify ESG opportunities for improvement. Capabilities4 Proxy voting5 US$65.6bn AUM in ESG integrative Deep conviction, investor-led and investor- approaches/responsible investment in driven with 24/6 coverage globally. 9 investment centres across 15 investment teams. Proprietary Proxy Voting Platform. Increase of 21% in ESG AUM from 2016, Voted 99.6% of 18,000 meetings, including US$3.9bn converted to ESG and 80,000 ballots, and 210,000 proposals US$1.2bn in new accounts and products.2 in 72 unique markets. Exclusionary screening, values-based 64% increase in our support of exclusion, norms-based screening, best-in- environmental proposals. class, thematic, and full ESG integration. Supported 44% of shareholder proposals 1 As of 30 September 2017. Invesco’s controversial weapons policy and 42% of activist campaigns. 2 US$54.0bn as of 31 December 2016. covers an additional US$152bn, including 3 For further information US$65bn which began excluding controversial Voted against 15% of director-related regarding Invesco’s Controversial weapons in 2017.3 proposals. Weapons Policy please go to invescomanagementcompany.lu. 4 As of 31 December 2017. 5 Voting from 1 July 2016 to 30 June 2017. 6 Ranked 3rd among 20 brokers and asset managers in North America with top 4 considered ESG leaders. 12


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    Investment stewardship Active ownership ESG Excellence Signatory to the PRI, UK Stewardship Invesco has a deep engagement practice In 2017, Invesco Real Estate has six Code and Japan Stewardship Code. and active ownership platform. strategies rated as "Green Star" with three of the strategies ranked 1st in their A+ rated by PRI in 2017 for Strategy & Invesco Quantitative Strategies leverages respective peer groups. Governance, including a 43% increase in Vigeo Eiris, an ESG leader, for targeted PRI assessment score from 2015. engagement, letter writing, and screening. Finalist for CIO’s inaugural Industry Innovation Award for ESG in 2017. Invesco Perpetual assessed Tier 1 by Involvement in industry organisations: FRC since 2016. – Company Reporting and Auditing Group – Financial Reporting Council – AQR Identified as an ESG Leader among brokers Committee and asset managers in North America.6 Corporate stewardship Thought leadership Carbon disclosure Recipient of City of Charlottetown's Development of white papers and pieces Invesco is an active participant in the Sustainable Business Certification in 2017. promoting responsible investment: CDP’s climate change program. – Proxy voting: The hallmark of active Associated with Globechain for advancing ownership Environmental data collation. the CSR capabilities. – Responsible investing and active ownership Carbon Trust Standard certified, realising LEED Green Building certified, Global – Sustainable Factor Investing minimum 3% annual energy reduction. ISO 14001 certified, and FTSE4Good – China green bonds Index constituent. – SRI… isn’t that what we have been doing all this time? In 2017, participated in UN World Environment Day and WWF Earth Hour. Participation in industry organisations: – PRI ESG Advisory Committee – PRI SDG Working Group for Active Ownership – Deep Data Delivery Standards – UKSIF Board of Directors 13


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    Recognition PRI assessment: Increased aggregate score each year In the news – A+ for Strategy & Governance – A for Fixed Income SSA ESG investing – A for additional modules Martin L. Flanagan, President, CEO and – Growth of a dedicated Responsible Investment team director, emphasised ESG as an integral – Enhanced transparency reporting part of company’s focused growth in an – Stronger engagement reporting interview with Atlanta Business Chronicle. Chief Investment Officer’s 2017 Industry Innovation Awards Sustainable investment – getting it right shortlisted Invesco as a finalist for the 2017 Asset Management Manuela von Ditfurth and Dr. Martin and Service Provider – Spotlight on ESG Investing category. Kolrep, Senior Portfolio Managers with IQS, authored an sustainable investment Identified as an ESG leader among brokers and asset managers article in major German publication in North America1 Börsen-Zeitung. – Corporate governance (7/10) – Executive compensation (8/10) Doing well by doing good – Stewardship of client's cash (7/10) Manuela von Ditfurth, Senior Portfolio Manager with IQS, authored a piece in Tier 1 UK Stewardship Code German finance publication hermoney.de. Mainland green bonds the asset class to watch for investors A version of the whitepaper by Ken Hu, CIO, Fixed Income, Asia Pacific, appeared in South China Morning Post. Identified as an ESG leader among brokers and asset managers in North America (scores out of 10)1, 2 Corporate governance 7 Executive compensation 8 Stewardship of client’s cash 7 Total ESG score 7.3 1 Ranked 3rd out of 20 asset managers and brokers in North America with top 4 considered ESG leaders. 2 For illustrative purposes only. 15


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    Our leading ESG strategies


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    Invesco Real Estate – US Direct Properties Full ESG integration Invesco Real Estate (IRE) was an early adopter of ESG Invesco Real Estate 2017 GRESB assessment recognition practices and since 2008, has continually sought to evolve credentials in this area. Today, IRE’s global leadership US Diversified in ESG practices is recognised by the #1 ranking from – Regional Sector Leader – #1 out of 47 North America/Diversified Global Real Estate Sustainability Benchmark (GRESB1): – #1 of 39 US Diversified – Invesco Real Estate ranked #1 in its US Diversified US Residential – Global Sector Leader peer group for the third consecutive year and has – #1 out of 80 Global Residential achieved the Regional Sector Leader status for – #1 out of 26 US Residential Private/North America/Diversified. Asia office – Regional Sector Leader – For the third year, IRE ranked #1 in its Asia Office peer – #1 out of 13 Asia Office group and earned the Regional Sector Leader status for Private/Asia/Office. – Invesco ranked #1 in its US Residential peer group and #1 out of 80 Residential participants globally, earning both Regional Sector Leader status for Private/North America/Residential and Global Sector Leader status. US$29.3bn In ESG AUM as of 31 December 2017 Invesco Real Estate: ESG integration2 Identify ESG value Stakeholder creation opportunities engagement Acquisition due Standing portfolio Disposition diligence 1 About GRESB: GRESB is an industry- driven organisation committed to assessing the ESG performance of real estate assets globally, including real estate portfolios and infrastructure assets. More than 250 members (of which about 60 are pension funds and their fiduciaries) use the GRESB data in their investment management and engagement process, with a clear goal to optimise the risk/return profile of real asset investments. Environmental impacts, resource constraints and urbanisation are some of the issues that institutional investors want to manage in their real estate Quarterly sustainability investments. (Source: www.gresb.com) performance report 2 For illustrative purposes only. 18


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    Invesco Quantitative Strategies Bespoke solutions For more than 17 years, Invesco Quantitative Strategies’ IQS has successfully been implementing broadly diversified multi factor strategies (IQS) team has been managing SRI portfolios and over more than 30 years, seeking to offering various ways to integrate ESG factors deeply capture factor premiums irrespective of within the investment process. By using a multi factor the prevailing market environment and timing considerations. approach, the criteria for selecting securities can be easily applied to tailored universes to meet specific client The team is convinced that certain factors requirements, such as those that include sustainable such as Value, Momentum and Quality explain wide parts of both returns and investment restrictions. risks in equity markets. The team’s track record demonstrates that applying factor weightings to a subset of the market in a diversified way has the potential to deliver strong risk-adjusted returns compared to an alternative weighting scheme that includes the market as a whole. US$2.7bn In ESG AUM as of 31 December 2017 Invesco Quantitative Strategies: ESG in investment process Equities Government bonds Active engagement IQS is able to define a set of ESG criteria IQS assesses countries on three broad IQS engages with the companies to in close co-operation with clients through aspects of sustainability with help of Vigeo identify weaknesses in the company's the Eiris Portfolio Manager (EPM) EIRIS Country Sustainability Ratings: sustainability management and discuss from Vigeo Eiris. The EPM consists of – Environmental – a country which limits these with management to enable the a database of 4,000 global companies its use of finite resources, minimises companies to achieve a better ESG which are analysed according to more its negative impacts on the global performance in the medium to long than 250 ESG criteria in terms of environment, and exercises stewardship term. The two engagement methods their social and ecological operations. over its natural environment is more practised by the IQS team are: Within the EPM exclusion criteria and likely to be sustainable. – Theme-based engagement to negative criteria can be used to eliminate – Social – a country which caters for encourage companies to expose companies that fail to meet certain ESG the education, health, welfare and and reduce systemic risks in areas criteria, with positive criteria, companies social needs of its inhabitants, which such as climate change, bribery can be identified, which are particularly develops the skills of all citizens, and and corruption. characterised by sustainable economic which has low levels of inequality is – Controversy-led engagement to development, positive products or more likely to be sustainable. prompt companies to observe processes. With the integrated best-in- – Governance – a well governed, non- internationally-recognised standards class approach companies are selected corrupt country which is responsive and conventions and correspondingly for the portfolio if they are leaders in to its inhabitants, treats them equally, improve their company guidelines. their industries with respect to ecological and respects their civil liberties, is and social standards. more likely to be sustainable. In addition, the following issues can be included: use of the death penalty; military expenditure; nuclear power consumption; and religious freedom. 19


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    Invesco Fixed Income Industry recognised Invesco Fixed Income scored an 'A' in the PRI Fixed ESG investing continuum Income category1, a testimony to the development and Screening integration of our broad ESG philosophy: The process of excluding or including securities based on a threshold. This takes three forms: exclusionary, norms-based or – Incorporating ESG criteria across all our investments best-in-class. is prudent for the long term – Evaluating issuers based on ESG criteria is seamlessly Integration of ESG factors The systematic and explicit inclusion by integrated into our fundamental research process investment managers of ESG factors into – Independently assessing each investment’s suitability traditional financial analysis. for ESG strategies is crucial Corporate engagement – Uniform standards for research and investment The use of investor power to influence decision-making across Invesco Fixed Income allows corporate behaviour, including through for ESG integration across asset classes direct communication, shareholder proposals, and proxy voting. – Focus on continuing to enhance our ESG capabilities US$6.0bn In ESG AUM as of 31 December 2017 1 Source: 2017 Assessment Report for Invesco Ltd., PRI. The investment categories are evaluated using 6 performance bands (A+, A, B, C, D, and E), where ‘A’ represents a score of 75% or above. 2 Invesco Fixed Income: ESG process flow2 For illustrative purposes only. Understand the Define ESG/sustainable Outline investment ESG investment goals and beliefs objectives environment Formulate ESG-tailored investment strategy Client-specific, detail-oriented process lays the foundation for achieving investment and ESG/sustainability objectives Establish governance and risk parameters Build portfolio Deeply integrated ESG process builds on traditional FI investment management Macro research Credit research capabilities Integrated ESG strategy Actively manage, report on progress and engage Continuous client engagement ensures mandate develops with investment environment and ESG opportunities 20


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    Invesco Fixed Income – Bank loans Active owners ESG plays a critical role in Invesco Senior Active engagement and dialogue with portfolio companies is the cornerstone Secured Management’s (ISSM) credit of Invesco’s governance approach. underwriting process and is a key discussion The investment teams concentrate factor in the Invesco Bank Loans team’s credit on each company’s ability to create sustainable value and, in the process, may evaluation of potential investment opportunities. question or challenge the company about ESG issues that could have an impact In addition to discussion on ESG issues, the on future value. Prior to investing in a company and throughout the ownership investment team leverages the MSCI ESG of the company’s debt, the senior loan research and is in the process of incorporating investment team will engage with the MSCI watchlist and broader MSCI ESG company management on a number of issues – including environmental, social research universe data into the existing front/ and governance. These discussions are back-end systems utilised by the investment designed to enhance ISSM’s understanding team, middle and back office professionals. of the long-term economic value of the company which includes a thoughtful process and approach to determining whether to invest in a company. Invesco Senior Secured Loans: Investment approach2 Investment process Decision makers/Second opinion Top down Macroeconomic perspective Investment Committee/CIO Portfolio strategy Senior Portfolio Manager/CIO Risk management Senior Portfolio Manager/CIO Portfolio Relative value Senior Portfolio Manager/Trading Sector rotation Team Leader Bottom up Fundamental credit analysis (ESG) Credit Analysts/Investment Committee 21


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    Invesco Japan – Japanese Equities Women in focus Our Japanese Equities team has active ownership and Women’s Power scores evaluate three areas research as the key components of the investment – Workplace: How much do companies strategies. One of the team’s best-in-class strategies emphasise women’s participation and aims to invest in companies with business strategies promotion? – Products and services: How much do reflecting women’s social advancement. companies care about women as a customer? By combining Invesco’s bottom-up fundamental research – Philosophy: Does a company lay down a code of conduct from capability and Nikko Research Center's “Women’s Power honesty, perseverance, harmony and Score”, the Japanese Equities team has built a strategy dedication perspectives? that invests in companies which achieve high growth by Bottom-up fundamental research harnessing women’s power. scrutinises – Management commitment to hiring and promoting women – Organisational support including child care, mentoring and training – Actual achievements as well as potential to improve the sustainability and flexibility of a company in the mid- to-long term utilising women’s power Invesco Japan – Japanese Equities: Stock selection process1 All listed Japanese stocks with market capitalisation over JPY 10bn US$25m In ESG AUM as at 31 December 2017 Investment universe (quantitative screening) – High earnings growth – High operating margin – High Return on Equity Fundamental research with an emphasis on growth Profitability analysis Risk analysis – Growth rate – Business risk – Competitive advantage period – Financial leverage Women’s social advancement analysis Screening for Women’s Power Fundamental research on “Women’s Power Score” Women Power – Workplace – Management commitment – Products and Services – Organisational support – Philosophy – Actual achievements and potential Product supporting women’s social advancement 1 For illustrative purposes only. 22


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    Invesco Global Smaller Companies strategies Frame and engage Over the last few years, ESG has played an important Our approach combines role in our investment process. ESG/SRI alongside the financial investment process. To formalise this, we have recently hired a dedicated ESG/SRI analyst who will be working closely with the fund managers on our Global Smaller Companies strategies to help embed ESG into our initial idea screening, fundamental research and portfolio monitoring. Invesco Global Smaller Companies strategies: Financial & ESG research work in tandem2 Financial investment process Idea generation Fundamental research Portfolio construction and risk management Watchlist Recommendation Optimal portfolio of smaller companies ESG/SRI process ESG risk and ESG analysis ESG monitoring rating assessment and active engagement Provides focal points for In depth analysis of Quarterly screening and fundamental research key ESG controversies management engagement 23


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    Invesco Perpetual Decisive ownership Invesco Perpetual’s (IP) emphasis on valuation and long term investment is aligned to a philosophy Tier 1 status of the importance of environmental, social Amongst 100 asset managers that are considered and governance momentum and stewardship. by the Financial Reporting Council (FRC) as We believe that improvements in corporate appropriately demonstrating the commitment to the UK Stewardship Code. ESG performance over time can contribute to investment value creation. We underpin this belief by active dialogue with our investee companies on relevant ESG factors. We also have the capability to provide segregated ESG solutions driven by 2,219 client values. Company meetings across global regions 2017 YTD.1 IP is a signatory to the UK Stewardship Code and has achieved a Tier 1 status. Indeed, IP has a dedicated ESG specialist forming part of the CIO UKSIF members oversight function to assist portfolio managers The UK Sustainable Investment and Finance Association in implementation of responsible investment. (UKSIF) mission is to support their members in growing sustainable and responsible finance in the UK. Furthermore, we are active members of UKSIF and our UK equities team are actively engaged with the Investor Forum UK, an organisation set up to support collective engagement on UK companies. 1 Source: Invesco as of 30 September 2017. 2 For illustrative purposes only. 3 The current outcome is not necessarily reflective of future views. 24


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    Invesco Perpetual: Active ownership examples2 Team Type of company ESG factor Process Outcome3 IP European Equities European integrated Corporate integrity and ESG elements raised Reassured by oil and gas internal control during company transparent company analysis and discussed response with investor relations during call IP Global Equities Global automaker Corporate governance, Investment analysis Invested on the emissions testing and highlighted concerns basis of continuing supply chain over corporate opportunity for further governance. Post improvements emission testing concerns, the company demonstrated a willingness to change IP UK Equities Oil services Corporate governance Requested the Maintained the assistance of the investment with Investor Forum UK success in changing board directors IP Emerging Market Russian mining Environmental and Met Chairman who Continue to monitor Equities company social factors highlighted their improvement story ESG commitments and rationale for a substantial capital investment to improve operations and mitigate pollution IP Asian Equities Global technology Corporate governance Persistently raised Announced a company concerns about lack of meaningful shareholder minority shareholder return policy and a focus (low dividend corporate restructuring payout) and complex is being envisaged company structure 25


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    Invesco Unit Investment Trusts Long term value creation The Invesco Unit Investment Finding opportunities in the ESG space ESG selection process The UIT team has launched a strategy that Trusts (UIT) team believes that provides a targeted opportunity for advisors Fundamental ESG analysis investors are integrating ESG in a to access a growing market segment, Evaluate a company’s ESG profile primarily myriad of ways including, but not allowing investors to invest beyond profit through examination of the company’s and returns, with a goal of long-term value environmental impact, social values limited to: investing with values, creation that is aligned with environmental, and governance practices to focus impact investing, and using ESG social and corporate responsibility. on companies demonstrating highly to attempt to reduce risk. favourable ESG practices. The strategy seeks to provide the potential for capital appreciation and current income ESG commitment analysis by investing in a portfolio of US listed From the selected companies, focus companies demonstrating highly favourable on companies with generally stable or ESG characteristics and practices. To achieve increasing levels of commitment towards this, two common ESG investment methods their ESG practices. are incorporated within the process: Fundamental financial analysis – Best-in-class: Our best-in-class Identify companies exhibiting attractive approach helps define our selectable valuations, history for above average universe. However, rather than growth, generating attractive operating just including companies that are and free cash flows, history of maintaining “above average” from an overall a strong balance sheet as well as making ESG rating/score, the strategy seeks disciplined capital management decisions, companies that are consistent leaders and a history of above average returns on across environmental, social and invested capital. corporate governance factors. The strategy seeks to identify leaders who are increasing their level of ESG engagement, rather than companies that excel at one or two things while ignoring other areas that could leave them open to controversy. – ESG integration: The UIT team also believes in the value of ESG integration within the fundamental investment framework. We use this method to build the final portfolio by incorporating ESG data with fundamental financial analysis. We believe that combining these approaches allows for a diversified portfolio with broader sector representation. 26


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    Our leading ESG strategies Summary Investment centres1 ESG AUM (31 December 2017) ESG capabilities Invesco Real Estate US$44.7bn US Direct Property, European Direct – 3 teams Property and Asia-Pacific Direct Property including 3rd party green building certified assets Invesco Perpetual US$8.3bn Asian Equities Ex-Japan and Multi-Asset – 2 teams Invesco Fixed Income US$6.0bn Emerging Markets, Global Investment – 4 teams Grade, Multi-Sector and Senior Secured Bank Loans Invesco Quantitative Strategies US$2.7bn Global Quantitative, Global Small Company, – 1 team European Enhanced, Global Passive, European Passive and Balanced Solutions Invesco Fundamental Equities US$2.2bn US Growth Large Cap Equity – 1 team Invesco PowerShares US$1.4bn Clean Technology, Clean Energy and Water – 1 team Global Asset Allocation US$220m Active Balanced Solutions – 1 team Invesco Japan US$25m Japan Growth Equities – 1 team Invesco Unit Investment Trusts US$3m Equity Trust – 1 team Grand total US$65.6bn2 1 The following investment centres (teams) were previously identified with ESG capabilities as of 30 September 2017 in error: Invesco Real Estate $2.0bn (Real Estate Investment Trust Securities), Invesco Fundamental Equities $6.9bn (US Value Equity Income, US Growth Small Cap Equity, International Global Growth Equity, US Value Mid-Cap Equity), Invesco Perpetual $224m (European Equities), Investment Solutions $211m. 2 AUM differences due to rounding. 27


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    Proxy voting


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    Active ownership Our differentiated approach to ESG and proxy voting At Invesco, active ownership is an integral part of the Guiding principles – Invesco votes for proposals that investment process. Our engagement approach provides maximise long-term shareholder value. a forum for our investors to engage with issuers and an opportunity for consensus voting. Our proprietary – Invesco believes in corporate accountability and supports governance platform allows us to build upon our institutional base of structures reinforcing management’s knowledge of the portfolio companies in which we invest accountability to its board of directors and supplies a global platform for active internal diligence. and a board of directors’ accountability to its shareholders. Invesco’s fund managers champion our high conviction – Invesco believes that environmental, approach and this in turn reflects a purposeful focus to social and corporate governance proposals can also influence long-term proxy voting. shareholder value and should be voted in a manner where such long-term Our active ownership policies and practices include shareholder value is maximised. ongoing engagement with corporates, boards, and Invesco’s proprietary voting platform advisory bodies, on-site due diligence and an internal One of the most important foundations governance committee as inputs into our investment of Invesco's ESG efforts is a highly flexible proprietary voting platform that allows fund and proxy voting decisions made at the portfolio level. managers to take well informed, thoughtful and independent proxy investment decisions. This unique industry platform enables Invesco to build the institutional base of knowledge on corporate issuers, streamline the delivery of research, and support dialogue and transparency across the firm relative to voting patterns. Invesco is differentiated by our proprietary global proxy voting platform, known as the Fund Manager Portal. Our proprietary proxy voting platform – filed for patent in US and India – streamlines the research, proxy voting Our differentiated ‘Investor first’ structure1 and ballot reconciliation processes, as well as related functions including managing Global Local conflict of interest issuers. Managing these processes internally, as opposed to relying on third parties, gives Invesco Centralised Global voting Decentralised Team by greater quality control, oversight and support policy & practice decision making team led independence in the proxy voting and proprietary administration process. analysis Research infrastructure Global reporting Thought leadership 1 For illustrative purposes only. 30


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    Proxy voting Invesco's democratised framework We believe proxy voting is the hallmark of active Proxy oversight and transparency ownership and serves a powerful mechanism to Invesco’s global conflict of interest policy drive responsible investment, engagement and Invesco has a robust conflict of interest policy that investment stewardship. Through our democratised is guided by our investors. The Global Invesco Proxy Advisory Committee (Global IPAC) is composed of proxy voting framework, investment teams maintain equity investment team representatives and Invesco’s full discretion on voting of shares and may split vote. Global Head of Responsible Investment and serves as a forum to achieve an impartial, objective and uniform view on identified conflict of interest issuers. Conflicts Invesco's global proxy voting policy establishes: of interest are material and significant business relationships across Invesco including Invesco’s top – A principle-based global proxy voting 10 distribution partnerships, counter-party trading relationships and research partnerships. The Global framework for corporate governance as an IPAC will reach a consensus view, establish quorum and investor-driven function ultimately provide a uniform vote on any identified COI – Recognition that regional and regulatory issuer1. As an additional safeguard, the vote is entered into Invesco’s proprietary platform by the responsible regulations may vary and allows for investment team to confirm proper execution of the differentiated guidelines accordingly Global IPAC vote decision. For personal conflicts of – A robust conflict of interest policy interest, Global IPAC members are required to sign a yearly conflict of interest certification and report any potential conflicts that may require an abstention from Invesco’s investor-led, investor-driven proxy voting the vote deliberation process. approach helps to ensure that each meeting is voted in our clients’ best interests and each proposal, both Annual due diligence of vendor services We conduct annual due diligence on-site visits with management and shareholder, is considered in light our proxy advisory firms, ISS and Glass Lewis with a of the risk and materiality to the portfolios. broad objective of reviewing the governance structure of the proxy advisors: We cover critical research and operational topics including but not limited to procedures adopted for research, code of ethics, procedures adopted to manage conflict of interest, compliance and internal controls, risk management, business continuity and information security. Invesco’s global responsible investing expertise Worldwide Fund manager ESG champions Houston, US Global Head of Responsible Investment Houston, US Proxy Governance (2) Houston, US ESG Resource (2) Henley-on-Thames, UK ESG Resource (1) Henley-on-Thames, UK CSR Resource (1) Hyderabad, India Proxy Voting Administration (9) Hyderabad, India Governance/ESG Resource (2) 1 Only applies to investment advisers under Invesco’s Global Proxy Policy. For more information see invesco.com/corporate/about-us/proxy-voting. 31


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    Proxy voting Our global footprint – 99.6% meetings voted in 72 markets1, 2 During 2017, Invesco voted in 99.6% of Highlights2 all meetings in over 72 markets globally. – 18,000 meetings, 80,000 ballots and Invesco’s thoughtful proxy approach Increase in our support to 210,000 proposals1, 2 demonstrates independence from outside environmental proposals – 9 member Responsible Investment third parties, including advisory firms. We believe compensation programs should be team and a 9 member Proxy clearly aligned with performance and that Administration team management teams and boards should be accountable to shareholders. 64% An active approach to passive and index strategies For proxies held by certain client accounts managed in accordance with fixed income, money market and index strategies (including exchange traded funds), Increase in diversity proposals Invesco seeks to leverage the active- equity expertise and comprehensive proxy voting reviews conducted by teams employing active-equity strategies, which typically incorporate analysis of 24% proxy issues as a core component of the investment process. Support of all shareholder related proposals 44% Voted against management proposals related to the compensation 37% Supported all activist campaigns 42% 1 Rounded off to closest hundred. 2 Voting from 1 July 2016 to 30 June 2017. 3 For illustrative purposes only. 32


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    Regional proxy voting statistics2 “We believe in influencing In 2017, 65 percent of the 18,000 total meetings are voted from our United States, corporate practices through Canada and PowerShares locations and 16 engagement, dialogue and percent from our Asian investment centres. proxy voting, which is voting on On average, 88 percent of all the meetings issues at company AGMs. I think were voted in line with management. our record speaks for itself.” Bonnie Saynay, Global Head of Responsible Investment Voted in line with management, across locations (%)2, 3 Regional proxy voting statistics (%)2, 3 Americas 90 Americas 65 Asia 86 UK and CE 83 Asia 16 UK and CE 11 Other regions 8 33


  • Page 34

    Proxy voting ESG shareholder proposals Our commitment to sustainability Environmental and social shareholder proposals voted FOR (%) 20161 Invesco also supported 59% of all environment impact related 20172 is reflected in our policy, our and 31% of all Gender Diversity related proposals. practice and most importantly our results. We believe in a shareholder's rights to nominate directors to a company’s board and proxy Environmental Political Gender Climate Labor access provisions are one of Proposals Lobbying Diversity Risk Issues the mechanisms that enable that right. 59 53 46 44 43 36 31 25 1 Voting from 1 July 2015 to 30 June 2016. 2 Voting from 1 July 2016 to 8 30 June 2017. 3 Voting from 1 January 2016 to 31 December 2016. Votes that are not cast as “For” may be “Against”, “Do Not Vote” or “Abstain”. 0 34


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    Key shareholder proposals voted FOR (%) 20163 In 2017, we supported 84 percent of all shareholder related proposals concerning proxy access 20172 rights. In competing proposal situations where a company’s bylaws already provisioned proxy access and those bylaws were consistent with Invesco’s views, Invesco voted in support of the management proposal. Proxy Corporate Separate Compensation Access Governance Chair/CEO 84 81 71 66 60 57 56 43 Management proposals voted AGAINST (%) 20163 Invesco supported executive compensation proposals 78% percent of the time. While Invesco 20172 believes that properly constructed compensation plans are effective in creating incentives that induce management and employees of portfolio companies to create greater shareholder wealth, we have voted against the proposals that are overly dilutive and that appear likely to reduce the value of the client’s investment. The foundation of Invesco’s voting policy and practice is ensuring that boards are accountable to shareholders and as such, our fund managers voted against 15% of all director related proposals where accountability to the shareholder base was in question. Say on Pay Director Related 25 22 18 15 35


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    Engagement Maximising the shareholder relationship Engagement with portfolio companies continues to be an Our four-step approach to shareholder engagement comprises important component of our vote consideration process. – Email – Research Invesco believes that engagement leads to greater – Key topics – Engagement transparency and encourages dialogue between investors, governance administration and issuers. Our investment teams may question or We engage regularly on a variety of topics including challenge companies about ESG issues that could have an impact on future value. environmental, social and governance considerations as part of a thoughtful research process. Issuer/Investor Out of the engagement Invesco conducted engagement is conducted continuously and driven and year-to-date, the highest percentage of engagement took place with Financial firms prioritised by several factors, including but not limited to (19%) followed by Industrial firms (16%).1 changes in compensation models, corporate structure, mergers and acquisitions, unique shareholder proposals and proxy contests. Active engagement and dialogue with our portfolio companies is a key element of our investment process. Engagement with company management plays a fundamental role in our efforts to help manage, protect and enhance the value of our clients' investment. Our investment teams concentrate on each company's ability to create sustainable value and, in the process, may question or challenge the company about ESG issues that could have an impact on future value. 1 YTD 30 September 2017. 36


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    Invesco proxy voting season engagement highlights (%)1 98 Of times the company reached out to us directly 40 Offered CEO/Chairman and Directors to speak to our portfolio managers, analysts and governance team 33 Increase in engagement requests received 33 Of engagements took place to discuss executive compensation topics (the most common topic) 25 Of engagements took place to discuss corporate governance topics 19 Of engagements occurred by proxy solicitor firms 15 To discuss shareholder meeting proposals 3 Of engagements are conducted by activists 37


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    ESG case studies


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    Demonstrated active ownership: ESG case study Integrating ESG into the investment management process Invesco Real Estate ESG consideration Environmental Social Governance Company Engagement Engagement (cont.) US Direct Property Sustainable sites Material & Resources – Reduced emissions from conventional – Purchased 94% sustainable electronic ESG consideration commuting trips by 64%. Attributed equipment. During the performance Environmental to the use of public transportation by period, 94% of electronics purchased – Sustainable sites building occupants. by tenants met LEED sustainability – Water efficiency criteria such as ENERGY STAR’s – Energy and atmosphere – Reduced the heat island effect. The building qualification for electronics. – Material and resources has a white roof with a LEED-compliant – Indoor environmental Solar Reflectance Index (SRI) of 99. – Recycled 56% of ongoing consumable. quality The recycling rate was achieved by – Reduced light pollution. Interior the building’s existing, comprehensive lighting is programmed to turn off recycling program. Method/Research after hours. All exterior fixtures 50 Sustainability objectives at watts and over are partially or fully – Diverted 100% of durable goods the asset-level are identified shielded so that they do not directly waste. An electronics recycling event and prioritised (based emit to the night sky. was held for all building occupants on market, tenancy, and resulting in 5,103 pounds of home and regulatory conditions as well Water efficiency office electronic waste diverted from as asset strategy) as part of – Reduced indoor plumbing water use the landfill. the annual business plan and by 31% compared to standard fixtures. budgeting process. Existing high efficiency fixtures will Indoor Environmental Quality reduce water usage by approximately – Using high grade air conditioning filters. 682,000 gallons per year. MERV 13 filters are installed in all air handling units resulting in improved air Energy & Atmosphere quality for building occupants. – Earned EPA’s Energy Star certification, with a score of 95 out of 100. – Achieved views to the outdoors for 57% of occupied spaces. Due to existing – Implemented low-cost Energy office space layouts and prominent Conservation Measures (ECM). ECMs vision glazing, views are provided for identified in the ASHRAE Level II Audit the majority of occupied areas. were completed during the performance period including LED lighting retrofits – Purchased 97% sustainable cleaning in stairwells and ground floor sconces, products during the performance as well as new signage promoting the use period. Sustainable purchases of the revolving doors. These ECMs are included Green Seal-certified cleaning estimated to save 36,898 kWh annually. chemicals and paper products with recycled content. – Purchased 63% off-site renewable energy. Renewable energy certificates were purchased to offset the emissions Outcome for 63% of the building’s energy usage – 95 Energy Star score for two years. Together, the ECMs – 31% water use reduction and offsets will result in a reduction – 5,103 pounds of e-waste diverted of 893.95 metric tons of CO2. That is from landfill equivalent to the emissions produced – 893.95 metric tons of CO2 emissions from the electricity use of 94.4 homes reductions for a year. – Earned EPA’s Energy Star certification For illustrative purposes only. 40


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    Demonstrated active ownership: ESG case study Supporting shareholder issues Invesco Fundamental Equities, Invesco Unit Investment Trusts, Invesco PowerShares, Invesco Japan ESG consideration Environmental Social Governance Company Proxy voting Outcome Multiple companies – During 2016 and 2017, Invesco – Each Invesco investment team voted supported multiple shareholder proposals AGAINST management in support of Industry sectors including: proposing Sustainability Reporting. the shareholder proposal – Health Care – Shareholder support percentage – Energy – ISS recommended AGAINST ranged from 7%-55% – Consumer Discretionary management in each instance. – Two of the 14 proposals were accepted – Consumer Staples – Industrials – ISS: A vote FOR this proposal is – Restaurants warranted, as shareholders would benefit from the information disclosed Country: US in a comprehensive sustainability report. Such information would allow shareholders to better evaluate the ESG consideration company's sustainability performance Environmental and its management of related risks – Sustainability Reporting and opportunities. – Glass Lewis recommended AGAINST Method/Research management in 13 of the 14 instances. 14 annual meetings in Quarter 1 2016, Quarter 2 2016 and – Glass Lewis: The production of the Quarter 2 2017. requested report would help shareholders better understand the sustainability- Invesco was a Top 20 rank related risks facing the company. holder for two of the meetings. 41


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    Demonstrated active ownership: ESG case study Incorporating ESG into an investment decision Invesco Perpetual – Emerging Market Equities ESG consideration Environmental Social Governance Company Rationale Outcome IVA Industry: Metals and – Invesco Perpetual’s Emerging Markets Invesco Perpetual’s Emerging Markets Mining – Precious Metals Equities investment team has at times Equities investment team recognises that sought diversification by investing in this lowers the risk profile of the business, Country: Canada gold mining companies. and this added considerably to the decision to invest in the company’s equity. – However, in evaluating equities in the ESG consideration gold mining sector, the investment Environmental managers have found that South African – Mining risks mining companies faced significant environmental risks as a result of their Social very deep mines (often resulting in – Health/Safety risks safety issues as well), and social risks – Labour risks related to labour disputes, including – Community relations frequent and sometimes violent strike action by their labour force. Method/Research – These ESG risks have deterred the Investment decision making investment managers from investing during 2016. in this sector in South Africa. – Instead, the investment team is invested in a company which operates in Latin America, and in comparison with South African miners, has a more attractive ESG risk profile. – The company not only has a large resource base and some of the lowest cash costs in the industry, but importantly the company also operates in some of the most stable mining jurisdictions and puts Corporate Social Responsibility at the core of how it operates. – Health, safety, environment and community relations programs are integrated into all their operations, and the company recognises the role that these efforts play in delivering their overall objective of creating value for stakeholders. For illustrative purposes only. 42


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    Demonstrated active ownership: ESG case study Service provider engagement Invesco Quantitative Strategies ESG consideration Environmental Social Governance Company Engagement Outcome IVA Industry: Banks – The company indicates that it has The company is considered to have enacted counter terrorism financing addressed all the issues: Country: France measures with respect to locations, entities or individuals which may be – Recognition of the issue linked to Daesh/ISIS, as a supplement – Updated risk assessments ESG consideration to its global Financial Security – Detailed policies relating to compliance Social Programmes. with international sanctions and – Provision of finance to terrorism lists military organisations – These measures include a risk-based – Description of ‘Know Your Customer’ compliance programme designed to processes ensure conformity with applicable anti- – Auditing programmes Method/Research money laundering, anti-corruption, – Compliance measures Third Party engagement counter terrorism and financing and, conducted in 2016. U.N., EU, French or US sanctions, laws or regulations. – The bank has also implemented some Financial Action Task Force (FATF) recommendations, as well as EU or French Authorities’ vigilance requirements against ISIS and the financing of terrorism. It has adjusted its activity in countries where the bank has no physical presence and a number of corresponding banking accounts or activities, and Swift keys have been closed. Transactions involving these countries are subject to the highest degree of surveillance. – Summary points – Adopted counter terrorism financing measures with respect to locations, entities or individuals which may be linked to Daesh – Adopted and maintains a risk- based compliance programme – Implemented FATF recommendations against Daesh or the financing of terrorism, – Transactions involving high risk countries are subject to the highest degree of surveillance 43


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    Demonstrated active ownership: ESG case study Proxy voting against management Invesco Fundamental Equities ESG consideration Environmental Social Governance Company Proxy voting Outcome GICS Sub-Industry: – Proxy proposal #5: Shareholder Proxy proposal #5: Shareholder proposal Communications Equipment proposal regarding diversity report regarding diversity report – 48% FOR (AGAINST management) Country: US – Shareholders request that the = rejected company prepare a diversity report, at reasonable cost and omitting confidential Invesco Fundamental Equities – Growth ESG consideration information, available to investors Large Cap: While proposal #5 may or Social may not represent the views of Invesco – Diversity – All Invesco investment centres voted investors, we do closely watch corporate AGAINST management governance as a factor in our investment process. Invesco is monitoring their Method/Research – ISS and GL recommended AGAINST response and will discuss with the company Annual Meeting in 4th Quarter management in the course of our normal research 2017. discussions. Invesco’s interest here is not – ISS: A vote FOR this resolution is as much in the particular proposition as it Invesco was a <1% holder and warranted, as additional diversity- is about how they handle formal feedback not a rank holder. related disclosure would allow that has substantial shareholder backing. shareholders to better assess the effectiveness of the company's diversity policies, initiatives, and management's efforts to address related risks. – Glass Lewis: The requested reporting would allow shareholders to monitor how the company is managing diversity-related issues. Particularly given the dearth of reporting provided by the company, we believe that the request of this proposal is appropriate. For illustrative purposes only. 44


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    Demonstrated active ownership: ESG case study Incorporating ESG into an investment decision Invesco Perpetual – Emerging Market Equities ESG consideration Environmental Social Governance Company Rationale Outcome IVA Industry: Wireless – The company historically expanded Considering the fines levied on their Telecommunication Services its operations into other countries of peer companies and the rising possibility the former Soviet Union, including that a regulatory fine could damage the Country: Russia Uzbekistan, which is a challenging company’s reputation and ability to pay its market to operate in, not least usually substantial dividend, the decision because the country scores poorly on was made to remove this company from ESG consideration international indices of corruption. For Invesco Perpetual’s Emerging Markets Governance example, Uzbekistan ranked 153rd Equities investment team’s holdings. – Uzbekistan corruption out of 168 countries in Transparency International’s widely cited Corruption Perceptions Index in 2015. Method/Research Investment decision making – Other multinational telecom during 2016. companies faced heavy regulatory fines in 2016 following investigations into bribery charges in regard to how they entered the Uzbekistan market and their participation in spectrum auctions. The company is also under investigation for its participation in spectrum auctions in Uzbekistan, leading to fears that they could also face substantial fines should their behaviour be found to be unethical. – In Invesco Perpetual’s Emerging Markets Equities investment team’s ongoing evaluation of its investment in the company, concerns over the impact of the ongoing investigation became a critical factor, due to both the serious nature of the allegations and the significant financial impact should they face a fine. – During engagement with the company, the investment team has sought to understand the allegations in regard to Uzbek spectrum auctions in detail, and has repeatedly encouraged the company to ensure it has the processes in place to reduce the risk that any such situation could occur again. However, alongside other risks such as rising competition in the company’s core mobile market and high churn rates in the Russian market, the rising risk of a fine for corrupt practices stood out as a threat to the sustainability of the company’s business model. 45


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    Demonstrated active ownership: ESG case study Letter writing campaign Invesco Fundamental Equities ESG consideration Environmental Social Governance Company Engagement Outcome Industry Sector: Energy – Following the annual meetings in – Ongoing into 2018. Quarter 2 2017, Invesco Fundamental – Going forward Invesco Fundamental Country: USA Equities engaged with energy companies Equities will consider withdrawing because current compensation support for the board unless changes to programs have allowed the industry the compensation program are made. ESG consideration to destroy shareholder value. Invesco – The response cannot be that your Governance Fundamental Equities believes that program mirrors industry practices. – Executive compensation returns drive shareholder value and Invesco Fundamental Equities feels ultimately share price appreciation. there is more that can be done and that each company can help lead the Method/Research – Invesco Fundamental Equities industry in this effort. Letter writing campaigns in expressed concerns about each 2nd half 2017. company’s total compensation plan and the behaviour we believe it Invesco is a Top 20 rank holder encourages within the industry. for each of the three, with 1-5%. – Invesco Fundamental Equities believes each board is responsible for establishing tangible and appropriate standards to which the management team can be held accountable and paid based on their ability to meet these standards. – Invesco Fundamental Equities focused on the Long Term Incentive Plan (LTIP) and Return on Average Capital Employed (ROACE). – Invesco Fundamental Equities has found that over time ROACE is highly correlated with stock price performance and drives behaviour. – Other companies have completely removed production growth from their LTIP and substituted it with ROACE. Their plans appropriately balance Total Shareholder Returns (TSR), Earnings Per Share (EPS) growth, ROACE, and cash flow growth. – Invesco Fundamental Equities has seen a positive change in behaviour since these modifications have been implemented. This is representative of the direction in which we believe the industry needs to move. For illustrative purposes only. 46


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    Demonstrated active ownership: ESG case study Proxy voting against management Invesco Japan, Invesco PowerShares, Invesco Australia, Invesco Perpetual, Invesco Fundamental Equities ESG consideration Environmental Social Governance Company Activist Campaign Outcome IVA Industry: Banks – An individual activist shareholder, – Each Invesco investment team voted won 48% of the votes for his proposal AGAINST management in support of Country: Japan to amend the articles to restore the activist proposal. shareholder authority to vote – 2016 Annual Meeting Results: on income allocation and submit The activist received 48% support ESG consideration proposals related to income allocation. = proposal rejected. Governance – The activist has filed the proposal – Amend articles to restore – The vote in favour of the proposal again in 2017. shareholder authority to increased from the previous year’s 41%. vote on income allocation – “This is a milestone [for activist investors]. The company has no choice Method/Research but to change its articles next year,” Annual meeting in 2nd said a Tokyo-based activist. Quarter 2016. – “The company cannot dismiss a proposal Invesco was a <1% holder. with broad shareholder support even if it comes from a small stakeholder,” said another institutional investor. – Proxy voting advisers were split in their analysis. 47


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    Demonstrated active ownership: ESG case study Proxy voting against management Invesco Japan – Japanese Equities ESG consideration Environmental Social Governance Company Activist Campaign Outcome GICS Sub-Industry: – Shareholder proposal regarding sale of – The investment team voted AGAINST Building Products shares held for strategic reasons management in support of the activist – The company shall immediately proposals. Country: Japan sell all the listed shares which it – 2016 Annual Meeting Results: The holds for reasons other than pure activist received support of 12% investment purposes as of the regarding sale of shares held for ESG consideration effective date of the revision of the strategic reasons and 11% regarding Governance provision of articles. distribution of dividends. – Shareholder proposal – “Cross-Shareholdings“ are cases – The activist has filed the proposals regarding sale of shares where listed companies hold the again in 2017. held for strategic reasons share of other listed companies for – Shareholder proposal reasons other than pure investment regarding distribution purposes, for example, to of dividends strengthen business relationships. – The activist engaged with the company and was not satisfied with Method/Research the reasons provided by the company Annual Meeting in 2nd for ownership of the shares. Quarter 2016. – After disposition of such "Cross- Shareholdings", the company Invesco was a <1% holder. can utilise the funds effectively for new business developments, mergers, acquisitions, and can utilise the proceeds as return to shareholders. – Shareholder proposal regarding distribution of dividends – We require that the dividend per share for this fiscal year is increased to the excess amount of the consolidated net profit per share to 10 yen (round down to the nearest integer). – The company does not need huge reserves on its balance sheet and should return surplus funds to shareholders. – These returns lead to increased shareholders' value. – This proposal is an alternate income allocation method not an additional dividend payment. Therefore, shareholders who wish to support this alternate method need to oppose management’s proposal. – Proxy voting advisers were split in their analysis. For illustrative purposes only. 48


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    Demonstrated active ownership: ESG case study Proxy voting against management Invesco Fundamental Equities, Invesco PowerShares, Invesco Unit Investment Trusts ESG consideration Environmental Social Governance Company Rationale Outcome IVA Industry: Investment – The initial compensation awards for – Each Invesco investment team voted Banking & Brokerage the Executive Chairmen are excessive AGAINST management. and are not tied to any meaningful – 2017 Annual Meeting results: Country: US performance hurdles. – Advisory vote to ratify named Executive Officers' compensation: – The Executive Chairmen received 46% AGAINST (AGAINST ESG consideration sign-on compensation awards in management) = accepted. Governance three tranches, two of which have – Advisory vote on executive no performance metrics tied to the compensation vesting schedule. – The Restricted Stock Unit (RSU) grant Method/Research exceeds the minimum stock ownership Annual Meeting in 2nd requirement for the Executive Quarter 2017. Chairman by 80%, which seems excessive by itself. Invesco was a Top 15 ranked holder with 2%. – The cash award is also adjustable by the Compensation Committee, but the metrics for adjustment are not outlined. – Total non-performance based sign- on bonus compensation seems excessive given the average annual compensation for the previous Executive Chairman. – It also seems well above any reasonable assumption for forfeited compensation at the previous employer. – The third tranche of the sign-on award was performance based, but was entirely subject to stock price performance. – These stock price hurdles were both achieved within the first three months of employment. – These awards should have been tied to fundamental business metrics as opposed to stock price by itself. – In summation, a vote AGAINST the Executive Comp proposal is warranted. 49


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    Our ESG journey A broad, deep, demonstrated and authentic approach Invesco Real Estate launched a strategy Invesco became a excluding military related investments UNPRI signatory Invesco Quantitative Strategies & Invesco signed on to the UK Invesco Fixed Income launched a Stewardship Code co-managed fund with a combination of best-in-class, positive, negative and exclusionary ESG strategies Council of Experts Concerning the Japanese version of the PowerShares launched Stewardship Code published the two ESG thematic ETFs Principles for Institutional Investors (Japan’s Stewardship Code) The PRI Principles Invesco’s first PRI were launched report submitted by the UN at the for period ended New York Stock 2014 Exchange 1987 2003 2005 2013 1989 1990 2006 2007 2010 2014 The UK Stewardship PowerShares Proxy Code was first voting transitioned published to Invesco Invesco Invesco Direct Real Estate Invesco signed on to the Quantitative began ESG integration Japanese Stewardship Code Strategies launched a fund with Positive/ Best-in-class Screening ESG Invesco Japan launched a fund Invesco US began voting proxies on Invesco’s strategy using a Womanomics Score proprietary Fund Manager (FM) Portal Invesco Fundamental Equities offers a fund excluding alcohol, tobacco and gambling 50

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