Morgan Stanley IM: Engage Summer 2023

We have engaged directly with companies on issues material to the sustainability of returns for over 20 years. As active managers running concentrated portfolios and with a long-term investment horizon, we believe we are well positioned to engage with management on material ESG topics and influence companies towards better practices.

In this edition:

• A further instalment of our ongoing dialogue with the world’s largest supplier of athletic shoes and apparel, continuing our conversation on sourcing and the supply chain. With regulation spurring on progress in the industry as a whole, the issue remains material.
• An overview of the initial findings of our thematic engagement programme on diversity with pharmaceutical and clinical research companies. A lack of diversity in clinical trials can pose a material risk at the company level; if a treatment is ineffective or causes harm as well as the significant risk it presents to patients, it also poses both financial and reputational risks to the companies involved.
• A report on our thematic engagement activities with several consumer staples companies in our portfolios to ascertain how they are tackling nature related risks in their businesses. From water use to ingredient sourcing, we discussed the material issues most pertinent to each company.
• An update on our latest engagement with a European multinational software company on management incentives and the positive changes they have made. We believe pay is critical in incentivising management to operate in the long-term interests of a company and its shareholders. Poorly structured incentive schemes can be a material risk for a company, inviting short-termism, capital misallocation, excessive risk taking, misaligned objectives and poor shareholder returns.

^{Risk Considerations}

^{There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. Changes in the worldwide economy, consumer spending, competition, demographics and consumer preferences, government regulation and economic conditions may adversely affect global franchise companies and may negatively impact the strategy to a greater extent than if the strategy’s assets were invested in a wider variety of companies. In general, equity securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. Stocks of small- and mid-capitalisation companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility. ESG strategies that incorporate impact investing and/or Environmental, Social and Governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance.}