The Fund utilises LGIM’s net zero framework to assess its portfolio’s carbon emissions intensity and temperature alignment profile during portfolio construction. Net zero alignment measures the extent to which issuers in which financial products invest either are, or are not, aligning their businesses to the Paris Agreement goal. The purpose of the Paris Agreement goal is to limit global warming to well below 2°C and as close to 1.5°C as possible above pre-industrial levels by 2100, which means targeting net zero carbon emissions globally by 2050 as the safest way to meet this goal. LGIM uses its proprietary model called LGIM [email protected] to evaluate and project companies’ carbon emissions intensity into the future and compare them with sector level targets to achieve alignment with the Paris Agreement goals, and to calculate the temperature alignment of financial products accordingly. The Fund seeks to achieve net zero alignment consistent with the Paris Agreement by:

• targeting a weighted average carbon emissions intensity, that is at least 50% lower by 31 December 2030 than the base-line level of the Benchmark Index as at 31 December 2019. Weighted average carbon emissions intensity measures the volume of carbon emissions of investee companies and/or countries in relation to the revenue they generate. The Fund will target net zero carbon emissions intensity by 2050. At inception the Fund achieved at least a 33% reduction in weighted average carbon emissions intensity compared to the base-line level of the Benchmark Index as at 31 December 2019.
• targeting an implied temperature alignment score of 1.5°C by 31 December 2030 onwards. At inception the Fund achieved an implied temperature alignment score of 2.75°C or below; and
• excluding investments in issuers which make investments in new thermal coal or oil sands capacity.

The SDGs were adopted by the United Nations in 2015 which integrate all three aspects of sustainable development; social, economic and environmental and are a call for action to promote prosperity and fight inequalities while protecting the planet. LGIM developed its own proprietary SDG scoring process which assesses the extent to which a company or sovereign issuer positively contributes to, or detracts from the SDGs by analysing revenue streams and business practices for companies and primarily human rights credentials for sovereign issuers. LGIM uses the SDG scoring process as a forward-looking indicator at the sector level to assess and determine whether a company’s or sovereign issuers alignment to the SDGs is (i) positive, (ii) negative, or (iii) neutral. Companies and/or sovereigns that demonstrate a negative alignment to one or more of the SDGs are excluded, including companies generating a certain level of their revenues from tobacco production.

The Future World Protection List (‘FWPL’) consists of companies that fail to meet minimum standards of globally accepted business practices on sustainability, or our minimum requirements on the carbon transition. There are three components to the list:

• Companies that generate 20% or more of their revenues from involvement in mining and extraction of thermal coal, thermal-coal power generation and oil sands,
• Companies that are in breach of one or more principles of the United Nation Global Compact for a continuous period of three years (36 months) or more (that are considered persistent violators), or
• Companies involved in the manufacture and production of controversial weapons.

The Fund excludes investments in companies on FWPL. The list is monitored on an on-going basis and updated semi-annually. In order to determine the companies included on the list, we use data from a number of external ESG data providers.

Further information can be found at https://www.lgim.com/landg-assets/lgim/_document-library/capabilities/future-world-protection-list-public-methodology.pdf

The Fund excludes companies that fail to meet LGIM’s minimum requirements on climate change following engagement under Climate Impact Pledge (‘CIP’).

• The CIP maps out a large number of companies worldwide, in climate-critical sectors against key indicators. Using quantitative and qualitative measures, such companies are assessed under a traffic light system drawing on independent data providers and our pioneering climate modelling.
• Based on the results of engagement with these companies, LGIM uses escalating methods as necessary, which includes a period of engagement with companies and in the event that a company continues to make insufficient progress and fails to meet LGIM’s minimum standard expectation, may include sanction through voting and divestment.
• The CIP is monitored on an on-going basis and updated annually. The ESG data that is used in connection with the CIP is sourced from third-party data providers.

Further information can be found at Climate Impact Pledge overview

LGIM considers ESG factors when making investment decisions on behalf of the Fund which include a number of environmental and social factors, for example relating to:

• climate change
• water and waste
• supply chain
• environmental policies and controls
• labour rights, health and safety
• bribery and corruption.

The evaluation process starts with the identification of ESG factors using both top-down and bottom-up approaches. The top-down research analysis focuses on determining the resiliency of sectors on a macro level, while the bottom-up research process evaluates the ESG credentials of individual companies.

LGIM has developed a proprietary research tool called Active ESG View which brings together granular quantitative and qualitative ESG inputs. Active ESG View primarily uses third-party data from multiple different vendors which includes hundreds of ESG metrics (including data on carbon emissions, water and waste, environmental policies and controls, labour, health and safety, bribery and corruption) spanning 64 specific sectors and/or sub-sectors from a number of ESG data providers.

The quantitative inputs consist of two components:

1. an ESG score calculated in Active ESG View which evaluates and scores issuers from an environmental, social and governance perspective, and
2. a screening of investee companies in respect of their involvement in certain products and services, and certain controversies and violations of norms and standards. This screening, directly or indirectly, maps to some of the adverse sustainability indicators set out in Table 1 of Annex I of the Level 2 Measures.

LGIM sets minimum thresholds for both of these components in Active ESG View. These are then supplemented by LGIM’s qualitative assessment of the sustainability risks and opportunities relating to the relevant issuer. This qualitative assessment is performed by the Global Research and Engagement Groups (“GREGs”) which bring together representatives from LGIM’s investment and investment stewardship teams across regions and asset classes. Where issuers fail to meet either of the components of the quantitative assessment, and the GREGs have reviewed and agreed with the assessment through qualitative analysis, LGIM will seek to limit the Fund’s aggregate exposure to such issuers relative to their weights in the Benchmark Index.

The sustainability indicator that will be used in relation to the attainment of the environmental and social characteristics relating to this process will measure the aggregate overweight exposure to issuers that are not aligned with LGIM’s requirements for ESG factor evaluation compared to such issuers' weight in the Benchmark Index.

While the Fund promotes environmental and social characteristics within the meaning of Article 8 of the SFDR, it does not currently commit to investing in any “sustainable investments” within the meaning of the SFDR. Accordingly, it should be noted that the investments underlying the Fund do not take into account the EU criteria for environmentally sustainable economic activities within the meaning of the Taxonomy Regulation.

While the Fund promotes environmental and social characteristics within the meaning of Article 8 of the SFDR, it does not currently commit to investing in any “sustainable investments” within the meaning of the SFDR.

The Fund considers principal adverse impacts on sustainability factors and LGIM has identified a subset of the adverse sustainability indicators that are relevant to the Fund’s investments. The Fund considers principal adverse impacts, identified using the below listed sustainability indicators, through the implementation of the Fund’s ESG investment strategy.

• PAI 1: GHG emissions
• PAI 2: Carbon footprint
• PAI 3: GHG intensity of companies
• PAI 4: Exposure to fossil fuel companies
• PAI 5: Share of non-renewable energy
• PAI 6: Energy consumption intensity
• PAI 7: Activities negatively affecting biodiversity-sensitive areas
• PAI 8: Emissions to water
• PAI 9: Hazardous waste and radioactive waste ratio
• PAI 10: Companies violating UNGC/OECD
• PAI 11: Companies without policies on UNGC/OECD
• PAI 12: Unadjusted gender pay gap
• PAI 13: Board gender diversity
• PAI 14: Controversial weapons