Sustainable, Responsible &/or ESG Policy:

SCREENS, THEMES AND POLICIES

The MSIM Fixed Income group has been growing its sustainability resources and capabilities over time, expanding the scope of proprietary ESG research coverage across fixed income asset classes, and deepening the analysis. The integration, in 2021, of Calvert Research and Management (“Calvert”) into MSIM has resulted in the addition of a significant number of sustainability specialists to the organisation. Calvert is a dedicated responsible investment and research platform with over 40 years of experience in ESG research and solutions, counting over 60 sustainability professionals across multiple functions, from research, stewardship and engagement, to ESG data & technology, among others.

The Fund’s sustainable objective is to support positive environmental and social impacts and outcomes by investing in certain types of bonds, which include the following instruments:

"Green Bonds”, including but not limited to the following instruments:

• bonds whose proceeds are targeted to environmentally beneficial projects
• Sustainability Bonds, with a proportion of the proceeds targeted to environmentally beneficial projects;
• Transition Bonds, with proceeds targeted to transitioning to more environmentally favourable business models;
• Sustainability-linked Bonds, with environmental key performance indicators and targets;
• bonds of issuers that seek to provide environmental solutions or that demonstrate environmental sustainability leadership; or
• bonds which are deemed by Calvert to make a significant social positive contribution either through the issuer’s products and services or through its practices or through the specific projects or investments financed by the bond issue. Such investments may include labelled Social Bonds, with proceeds allocated to projects focussed on positive social outcomes and / or target populations, or labelled Sustainability-linked Bonds with social key performance indicators and targets.

The above bonds may or may not be labelled as green, sustainable, transition, or social bonds by external labelling regimes.

As part of the investment strategy, the Fund applies the Calvert Principles to the investment universe to define eligible investments, and further assesses all securities through the proprietary Calvert Sustainable Bond evaluation framework to determine their eligibility for inclusion in the Fund.

The Calvert Principles for Responsible Investment (the “Calvert Principles”), provide a framework for considering ESG factors within the management of the Fund. The Calvert Principles assess investee activities and behaviours across a number of ESG themes (which are considered on a financial materiality basis) to construct a portfolio of issuers that Calvert considers to be leaders on ESG matters. All investments in the Fund will be evaluated according to the Calvert Principles. The Calvert Principles provide a framework to assess investee issuer activities and behaviours across a number of financially material ESG themes to determine their eligibility for Calvert funds. Portfolio managers then construct a portfolio of eligible issuers that meet their investment objective.

To conduct this analysis, Calvert uses the proprietary Calvert Research System (“CRS”) that leverages indicators sourced from third party data vendors, external research partners, and Calvert's own custom indicators to support measurement and ranking of issuer performance on a number of financially material ESG themes, as determined by expert ESG sector analysts based on proprietary peer groups across the investable universe. A specific set of underlying relevant indicators tied to each theme are then assigned to each sector peer group and weighted to produce a quantitative assessment for each issuer, with discounts applied based on circumstantial information (current and ongoing issues) from data vendors and news sources. Analysts then consider the information from CRS to determine if the issuer meets the Calvert Principles. Such determinations are presented to and approved by Calvert’s Responsible Research Review Committee. Occasionally, the Responsible Research Review Committee may deem an issuer to be eligible in accordance with the Calvert Principles pending the achievement of milestones set as part of Calvert's engagement activity with such issuer. The following themes are considered in CRS, as applicable, depending on an issuer’s peer group and the financial materiality of each theme to that peer group:

• Environmental themes:
• Biodiversity & Land
• Climate & Energy
• Overall Management of Environmental Risks
• Packaging and Electronic Waste
• Pollution and Waste
• Environmental Impacts of the Supply Chain
• Water
• Social themes:
• Employee Health and Safety
• Valuing Human Capital & Labour Management
• Privacy & Data Security
• Product Integrity
• Stakeholder Relations
• Social Impacts of the Supply Chain

In instances where ESG data is very limited and cannot be assessed through CRS, companies may undergo a qualitative assessment to determine if the issuer meets the Calvert Principles. Qualitative assessments, like quantitative assessments, are presented to and approved by Calvert's Responsible Research Review Committee.

Exclusions

The Fund shall not knowingly invest in corporate issuers which are deemed to be involved in the following:

• any activities (i.e. production, manufacturing, distribution or corporate ownership) related to controversial weapons (including anti-personnel landmines, cluster munitions, biological or chemical weapons, and nuclear weapons);
• manufacturing or production of civilian firearms, where a company derives 5% or more revenue from such business activity;
• manufacturing, production or distribution of military or conventional weapons, or weapons systems, where a company derives 10% or more revenue from such business activity;
• manufacturing or production of tobacco, or where a company derives 10% or more revenue exposure from tobacco distribution or retail;
• gambling, where the company derives 10% or more revenue from such business activity;
• exploration, mining, extraction, distribution or refining of thermal and metallurgical coal, where a company derives 1% or more revenue from such business activity;*
• exploration, extraction, refining or distribution of oil fuels, where a company derives 10% or more revenue from such business activity;*
• exploration, extraction, manufacturing or distribution of gaseous fuels, where a company derives 50% or more revenue from such business activity;* for the avoidance of doubt, biogas, biomethane, renewable and low carbon hydrogen or other gas that is considered renewable would not be excluded from the fund’s universe;
• exploration and/or production of oil sands, Arctic oil and/or gas, where a company derives 5% or more revenue from such business activity;* 
• electricity generation from thermal coal only, where a company derives 10% or more revenue from such business activity;*
• electricity generation based on thermal coal, oil and/or natural gas (either individually or combined), where a company derives 50% or more revenue from such business activity;* or 
• significant ESG controversies or violations of the UNGC Principles, the OECD Guidelines for Multinational Enterprises, the ILO Fundamental Principles or the UN Guiding Principles on Business and Human Rights, without evidence of material remediation and improvement.**

*The fund may, as an exception to the exclusions related to fossil fuels listed above, invest in labelled Sustainable Bonds which are intended to raise proceeds specifically for projects that promote positive environmental contributions mitigating the adverse sustainability impact of those fossil fuels, such as renewable energy or energy efficiency, based on information available in the bond issuance documentation. This exception applies to the extent that such bonds do not violate any of the other exclusion criteria listed above.

**Calvert maintains its own determination of significant ESG controversies or violations of UNGC Principles, informed by data sourced from third party providers.

In addition, the Fund will not invest in sovereign issuers which are in the bottom-10% ranked countries for social violations.

Calvert Sustainable Bond Evaluation

 All securities held in the Fund are evaluated against Calvert’s proprietary Sustainable Bond evaluation framework, which is intended to identify the likely environmental and/or social benefits of the securities in question. Calvert's proprietary Sustainable Bond evaluation framework (which has regard to, where appropriate, recognised green bond guidelines such as the ICMA Green Bonds Principles) assesses securities based on a number of factors including the following:

• issuer trajectory (e.g, issuer’s overall management of material environmental or social issues and the ambition, quality and scope of relevant targets in the issuer’s offering documents);
• whether the use of proceeds contributes to environmental or social objectives & project impact;
• alignment with external standards;
• project selection process by the issuer;
• governance (management of proceeds);
• the second party opinion given pre-issuance on the sustainability of the issuance;
• third-party assurance/verification of the environmental or social contribution of the project; and
• periodic reporting quality of the environmental or social contribution of the project.

 This assessment is typically driven at the security level, resulting in a score on a scale of 1-5, 5 being best and 3 generally being the minimum threshold for inclusion in the portfolio, but will in some circumstances instead be informed by reliance on recognised green bond guidelines.

INVESTMENT IMPACT

The Fund will make a minimum of 90% sustainable investments with an environmental or social objective.

The Fund seeks to ensure that the sustainable investments of the Fund do not cause significant harm to relevant environmental or social sustainable investment objectives by:

1. applying the Calvert Principles to determine an eligible investment universe that limits exposure to companies performing poorly on ESG matters;
2. testing whether the investment meets the thresholds set by the investment manager (the “investment manager”) for each of the mandatory principal adverse impact (“PAI”) indicators; and
3. ensuring that the sustainable investments of the Fund are aligned with the OECD Guidelines for Multinational Enterprises and the UN Principles on Business and Human Rights.

Process:

Part 1: ESG Research Process 

The Calvert ESG research team, composed of 25 analysts, leads the ESG research process in collaboration with the fundamental investment analysts to identify the most material ESG criteria and data indicators by sub-industry. The ESG analysts are organised by sector coverage, and some of them are further specialised – in addition to the standard corporate analysis – in fixed income-specific asset classes and structures, including private companies, sovereigns, securitisations, and Green and Sustainable-labelled bonds. The ESG analysts works closely, on a day-to-day basis, with credit analysts and portfolio managers to assess specific transactions, and to prepare and conduct engagement meetings with certain issuers.

The ESG analysts participate in the daily credit team's calls, as well as to quarterly sector reviews, to contribute specific sustainability insights.

Credit analysts are ultimately responsible for considering all of the available proprietary ESG research and information and assessing the potential impact of ESG-related issues onto their fundamental credit views, and for determining whether material sustainability risks and opportunities are reflected in the pricing

The ESG research process applicable to this strategy consists of two main steps:

1. An assessment of whether the issuer displays strong management of material sustainability issues, in line with the Calvert Principles, presented above. The Calvert Principles represent a framework for our sustainability evaluation of investments and to guide our engagement with issuers; and  
2. Calvert has developed a specific approach to assess each issuance of Green or other Sustainable-labelled Bonds for investment in the portfolio according to a proprietary Sustainable Bond Evaluation framework. This assessment is intended to help mitigate the risk of greenwashing and invest in transactions that abide by market best practice, with greater likelihood of delivering on the positive environmental and social impacts these bonds are originally designed to achieve.

A) Issuer-Level Assessment: The Fund must only hold issuers which are deemed eligible for investment according to the Calvert Principles. The Calvert Principles evaluate investee activities on various ESG themes to build a portfolio of issuers considered to be ESG leaders.  

To conduct this analysis, Calvert developed a proprietary research system leverages indicators sourced from third party data vendors, external research partners, and Calvert's own proprietary custom indicators to support measurement and ranking of issuer performance on different ESG themes. An expert team of ESG analysts assess companies across the investable universe creating peer groups with similar ESG issues. Each peer group is evaluated and a thesis is developed to determine the themes which are most financially material to the group. A specific set of themes and underlying relevant indicators deemed to be financially material to the issuer's specific peer group are scored, assigned and weighted. Additionally, Calvert's team of analysts review circumstantial information (current and ongoing issues) from data vendors and news sources to determine if the issuer may have issues detrimental to its performance. The circumstantial review is applied as a discount to an issuer's overall score in the internal research system. The analyst then reviews the information to determine if the issuer meets the Calvert Principles. Such determinations are then presented to and approved by Calvert's Research Review Committee.

When ESG data is very limited, a more qualitative approach is taken. Qualitative reviews follow the same governance process and results in the analyst preparing a write-up that indicates whether or not the issuer is adequately managing its material ESG risks and its performance on different ESG themes.

All determinations are then presented to and approved by the Responsible Research Review Committee. The following themes are considered in our research, as applicable, depending on an issuer's peer group and the financial materiality of each theme to that peer group:

Environmental themes:

• Biodiversity & Land
• Climate & Energy  
• Overall Management of Environmental Risks  
• Packaging and Electronic Waste  
• Pollution and Waste o Environmental Impacts of the Supply Chain  
• Water  

Social themes:

• Employee Health and Safety
• Valuing Human Capital & Labour Management  
• Privacy & Data Security
• Product Integrity
• Stakeholder Relations
• Social Impacts of the Supply Chain  

The themes listed above are each supported by several sub-themes that feed into the over 200 peer group models. In total, over 700 underlying vendor data points feed into these environmental and social thematic indicators. 

B) Issuance-Level Assessment: Our proprietary Sustainable Bond Evaluation Framework, presented in the chart below, seeks to assess each bond and score it based on multiple criteria, including the fit within the issuer’s broader strategy, the relevance and additionality of the selected projects or sustainability indicators in the context of the issuer’s core business, the alignment of the bond structure with best practice in the markets, such as the International Capital Market Association’s (ICMA) Green and Social Bond Principles, external verifications and the quality of reporting. The evaluation framework —which informs investments across our sustainable and mainstream portfolios—is aimed at informing portfolio managers and research analysts and is an integral component of the investment decision process for these instruments.

Part Two: Fundamental Credit Research Process

The team’s approach to fixed income investing uses a disciplined investment process and a commitment to research. Research is conducted by dedicated teams specializing in a particular niche of the fixed income market. The research teams use in-depth fundamental analysis, complemented by quantitative tools, to generate bottom-up investment ideas and are responsible for security selection.

Provided below are details on the team’s research process with overview of asset class specific research as follows:

Credit: A dedicated Credit team focuses on financial risk, business risk and management ability/intentions. When analyzing business risk, the team assesses an issuer’s competitive position, its diversification and growth potential, the value of its franchise and the flexibility of its business model in terms of the variability of its cost structure. Financial risk involves an examination of an issuer’s financial statements to assess the suitability of the issuer’s capital structure for the risk entailed in the issuer’s business. The team’s forward-looking proprietary cash flow models enable them to understand the likely future financial profile. The group also seeks to understand management’s intentions, in terms of business development and capital structure, and ability to execute.

The team then conducts a relative valuation assessment on potential investment candidates. Using default data and average risk premia, the team derives a fair value spread for each bond that is compared to the market spread to determine a bond’s under/overvaluation.

Sovereign: Their framework in conducting sovereign risk analysis consists of an assessment of a sovereign’s ability to pay as well as a qualitative opinion on its willingness to pay. This framework consists of:

• The Fiscal Position of the Sovereign: This comprises an analysis of the key macro-economic variables such as debt/GDP, annual deficit/surplus and its future trajectory, leverage in the economy, the efficiency of tax collection and the tax take percentage of GDP, and the ability to implement and maintain austerity plans.
• Growth Trajectory: What is the long term growth rate of the economy? This is a key factor in evaluating the ability to pay. Here we analyze the demography and skills of the labor force, the level and type of unemployment and the workforce participation rate, the level of productivity, cost competitiveness, and the trade position.
• Stability of the Banking System: A feature of the crisis, particularly in Europe, was the negative feedback loop between sovereigns and banks. Therefore, the Team consider carefully the potential size of contingent liabilities from the banking system on the sovereign, the ability of banks to lend and the cost of credit creation, the nature of their business and the strength of their balance sheets.

Part Three: Portfolio Construction

Portfolio managers are responsible for implementing the investment strategies. They work to construct each portfolio in a way that conforms to individual client/strategy guidelines and objectives, while staying true to the broad strategy targets that are set by the Asset Allocation team. The primary task of the Asset Allocation team is to identify the top-down allocations into each sub-sector of the fixed income market, together with interest rate and currency positions, in order to create the optimal blend of all the sub-asset classes. The Team seeks first to identify areas where implied market forecasts are out of line relative to historic trends and second, to identify the catalyst for the market to adjust. Internal debate is a key feature of our investment philosophy, ensuring investment ideas are tested thoroughly.

The portfolio managers achieve the targets set by the Asset Allocation team by working with the research analysts to fill the sector buckets with bottom-up security selection ideas, as described in Part One and Two of this response.

This ensures that portfolios are both consistently benefiting from our best investment ideas and adhering to client guidelines and risk/return objectives.

Portfolio managers have ultimate responsibility for fulfilling portfolio targets while simultaneously ensuring that all selected securities are compliant with the investment guidelines. Working together with our traders, the portfolio managers ensure that portfolio holdings remain appropriate for the portfolios on an ongoing basis.

DATA SOURCES

All of Calvert’s ESG research is conducted internally. Calvert’s ESG analysts review a wealth of data from diverse sources to evaluate a company’s ESG practices, policies and track record.

Calvert uses more than 20 ESG data sources across its entire ESG Research Process. These sources include:

• Alphasense
• Bloomberg
• CDP
• Climate Bond Initiative
• CSR Hub
• Equileap
• Emission Database for Global Atmospheric Research (EDGAR)
• Factset, Field Gibson Media
• Green Street, GRESB
• ISS
• Malpecroft
• Morningstar
• MSCI
• Proxy Insight
• Refinitiv
• RepRisk
• S&P/Tru Cost
• SASB
• SigWatch
• SNP – S&P Global Market Intelligence
• Sustainanlytics
• TruValue

Calvert’s ESG analysts also work with experts from academic, policy, and advocacy-oriented non-governmental organisations (NGOs), to inform their analysis. Calvert investment staff may also review SEC filings, reports from the United Nations, the World Bank and other international institutions; sustainability reports from the public or private sector, government databases, a company’s website and media coverage; and sell-side research.

It is important to know that Calvert does not use ESG ratings from other companies. We incorporate data from these sources to form our own view of how companies are managing their financially material ESG exposures.

Resources, Affiliations & Corporate Strategies:

ESG/SRI Resources

The team uses its proprietary ESG scorecard, the Material Risk Indicator (MRI), which aims to identify and assess potentially financially material ESG risks and opportunities facing each company; and the Pay X-Ray (where relevant and possible), which we use as a tool to try to assess whether a company’s pay practices are aligned with management’s intention and/or ability to deliver sustainably high long-term returns on operating capital.

Given our bottom-up fundamental approach to research, in most instances, the main source for our ESG analysis is a company’s own disclosures. Our well-resourced team conducts in-depth analysis of companies, including how potentially financially material ESG issues are approached, drawing on Annual Reports and, where relevant, additional ESG-related reports such as sustainability reports, cyber security reports or human resources-related reports. Our investment team may also engage with companies to further assess potentially financially material ESG issues relevant to companies and to understand their strategies to address these, to monitor progress, and to encourage companies towards better ESG practices where relevant to manage these potentially financially material risks and opportunities.

To support our research, the team may also use vendor applications and systems. In particular, the team uses FactSet Research Systems, a financial database and analytical tool that allows customised screenings of global companies according to various financial characteristics that may be associated with a strong business franchise. We also have access to ESG data and information from third party sources which we may use as additional points of reference during our research process. We have access to a broad set of mainstream ESG data providers including MSCI ESG, ISS, Sustainalytics and Trucost, as well as other more specialised data providers such as Equileap, a comprehensive global database on gender equality. We might also use external research from not-for-profit organisations that assess companies’ performance and management on key ESG issues where such issues are potentially financially material, such as the World Benchmarking Alliance (WBA), Forest 500, Zoological Society of London’s (ZSL’s) company assessment on key commodities such as Palm Oil, and KnowTheChain’s assessment of companies’ performance on forced labour in global supply chains.

No single data source is used to make a final investment decision but may contribute to the overall fundamental analysis of the company if considered relevant.

 Please note, external data is updated based on the provider. Data sourced from third party data providers may be subject to methodological limitations and may be subject to data lags, data coverage gaps or other issues impacting the quality of the data. ESG-related information, including where obtained from third-party data providers, is often based on qualitative or subjective assessment, and any one data source may not in itself present a complete picture relating to the ESG metric that it represents. MSIM takes reasonable steps to mitigate the risk of these limitations. However, it does not make any representation or warranty as to the completeness or accuracy of such data. Any such data may also be subject to change by the third party provider without notice. As such, MSIM may choose to take such action (or inaction) based on any change in data provided by a third party data provider as it deems appropriate in the circumstances.

Governance Structure & Responsibilities

The investment team is headed by Managing Director and portfolio manager William Lock. Other portfolio managers include Managing Directors Bruno Paulson, Nic Sochovsky, Marcus Watson, Alex Gabriele and Richard Perrott, and Executive Directors Isabelle Mast, Anton Kryachok and Marte Borhaug (Head of ESG). The International Equity team subscribes to a flat organizational culture; each team member has global sector research responsibilities and participates in investment decisions. The team also includes research analysts Alessandro Vaturi, Helena Miles, Sora Utzinger (ESG), Bart Dziedzic, Jinny Hyun and Toyosi Somoye. 

In addition to the bottom-up ESG research conducted by team members, our team’s Head of ESG and Portfolio Manager Marte Borhaug and Senior ESG Research Analyst Sora Utzinger add sustainability expertise and specialist research to the investment debate and our engagement with companies, where required. Marte reviews and contributes to ESG strategy for the team, liaises with Morgan Stanley, MSIM and external ESG resources, and co-ordinates ESG matters for the team. Sora focuses on supporting research, engagement strategy and proxy voting on potentially financially material ESG issues across the team’s strategies.

Proxy Voting

MSIM’s Proxy Voting Policy outlines our proxy voting procedures and high-level, principles-based voting guidelines while providing investment teams with adequate flexibility to make informed voting decisions in line with their investment goals and client expectations.

The MSIM Global Stewardship Team (GST) analyses proxies and provides vote recommendations to MSIM investment teams in accordance with the Proxy Voting Policy. Subsequently, vote recommendations along with rationales are then escalated to the relevant investment team, who have the ultimate decision on how to vote.

MSIM obtains research on issuers and selected environmental and social issues from its investment teams’ own research, as well as two independent advisers, Institutional Shareholder Services and Glass Lewis. MSIM does not outsource proxy voting decision-making to either firm.

ESG related affiliations and membership

Through its various businesses and internal functions, MSIM and Morgan Stanley participate in, belong to or take a leading role in many ESG-related initiatives and organizations.

This includes participating in industry conference panels, exploring joint research, and supporting the work of groups focused on ESG-related issues.

Please refer to our 2023 UK Stewardship Code Report, under "MSIM Collaborative Initiatives" - https://www.morganstanley.com/im/publication/resources/ukstewardshipcode_msim_en.pdf?1734703336999

Dialshifter

This fund is helping to ‘shift the dial from brown to green’ by…

Investing primarily in Green Bonds to promote environmentally beneficial projects, and by including the evaluation of positive and negative contributions towards sustainability objectives including, but not limited to, climate change mitigation and adaptation, pollution prevention and control, and circular economy.

SDR Labelling:

Not eligible to use label (out of scope)