Engagement and sustainability advocacy are increasingly important tools for driving positive change and capturing potential alpha opportunities. As active bond investors, we believe we have a duty to leverage our access to a variety of debt-issuing organisations and to express our expectations around how these organisations should improve their processes and practices, as we deploy capital toward positive environmental and social outcomes.

Our Fixed Income team continues to engage on an ongoing basis with issuers across the various asset classes that we cover. Over the past 12 months,¹ we conducted 145 ESG-focused engagement meetings, with three-in-four targeting carbon-intensive industries and financiers. We also translated words into action: almost one-third of the engagements influenced our investment strategy, leading us to invest in a new transaction, pass on a new issuance or reduce existing exposure.

In 2020, our Morgan Stanley Investment Management (MSIM) Fixed Income team ("we", the "Team") established an ESG Engagement Strategy, outlining the structure for our engagement activities, as well as priority sustainability themes, as follows:

• Decarbonisation & Climate Action
• Circular Economy & Waste Reduction
• Diverse & Inclusive Business
• Decent Work & Resilient Jobs
• Corporate Governance & Reporting Practices (cross-cutting theme)

Over the reporting year, the Intergovernmental Panel on Climate Change (IPCC)³ published three Working Group contributions for its Sixth Assessment Report,⁴ with the latest one taking stock of current progress on climate change mitigation, evaluating the adequacy of national climate pledges, and reiterating the urgency of setting the global economy on a pathway aligned with a 1.5°C scenario (i.e., 1.5°C climate warming above pre-industrial era global temperatures).

In line with these developments, this year we maintained a similar thematic breakdown to last year, with over one-half of our engagements focused on environmental risks and opportunities. The majority of our meetings focused on the setting of corporate science-based emission reduction targets and on investments in more energy efficient technologies. However, we also increased our strategic focus on promoting business models that effectively manage natural capital within a circular economy. In the first half of 2022, we started to address the topic of biodiversity in greater depth, particularly with companies in the Agribusiness and Food & Beverage sectors, focusing on topics including deforestation, upstream supply chain auditing, and land conflict management, among others. Following the launch of the Taskforce on Nature-related Financial Disclosures (TNFD)⁵ in June 2021, we also began to encourage companies to include time-bound biodiversity commitments into their sustainability strategies and green financing frameworks, where relevant.

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