var textForPages = ["2020 National Pension Fund Responsible Investment \& Governance Report","2020 National Pension Fund Responsible Investment \& Governance Report","Contents A An Introduction to Responsible Investment B Implementation of Responsible Investment C Global Investor Network D Way Forwards E Statistics of Stewardship Activities","2020 Responsible Investment \& Governance Report 1. An Introduction to Responsible Investment 1-1 What is Responsible Investment? Nation Pension Service conducts responsible investment (RI) as well as establishes and expands RI strategies in order to achieve long-term and stable returns. RI is implemented in two ways: ESG incorporation and active ownership. That is, in investment decision processes, environmental, social, and governance (ESG) factors are considered while active ownership is carried out through the exercise of voting rights and constructive engagement with companies so as to better manage ESG-related risk and enhance corporate value. ESG investments are conducted in three approaches: ESG integration, screening and thematic. ESG integration considers financial factors and non-financial factors all together. Screening uses filters to determine which companies, sectors, or activities are eligible or ineligible to be included in a portfolio. Thematic approach seeks to combine attractive risk return profiles with an intention to contribute to a specific environmental or social outcome. In addition, active ownership is undertaken through proxy voting and ownership engagement, including dialogue and shareholder proposals. Responsible Investment Approaches Application PRI Definition Activities Status ESG Investing Incorporate ESG considerations in Consider financial factors and non-financial factors, ❶ ESG Integration Yes investment decision for internally managed including ESG issues domestic equities As the FMC has introduced restriction screening strategies and declared carbon Exclude (Negative Screening) or include (Positive To be neutrality, NPS will develop a plan to ❷ Screening Screening) certain sectors or companies based on adopted gradually restrict investments in certain ESG performance sectors or companies, including investments in coal mining and energy Seek to combine attractive risk return profiles with ❸ Thematic an intention to contribute to a specific environmental No - or social outcome Active Ownership Exercise voting rights on domestic and ❹ Proxy Voting Exercise voting rights at shareholder meetings Yes global equities, etc. Engagement in non-management: dialogue (confidential dialogue, non-public focus list, public focus list) ❺ Engagement Engagement in management: shareholder proposal, Yes Engage in dialogues on focus areas and etc. (after being selected as public focus company) unexpected concerns of domestic equities Litigation: Shareholder Derivative Suit, damage suit, etc. 3 84 3 4","2020 NATIONAL PENSION FUND 1-2 Legal Basis for Responsible Investment A clear legal basis for responsible investment (RI) to incorporate ESG factors into investment decision has been in place since the amendment to the National Pension Act in January 2015. Reflecting this, a new provision to implement RI was added to the Fund Management Guideline in April 2016. Responsible Investment \& Governance Principles (Stewardship Code) and other guidelines were enacted and amended in July 2018 to lay the groundwork for active ownership. In December 2019, the Guideline on Active Ownership was enacted to describe specific measures on active ownership in a broader scope. In November 2019, the Plan to Facilitate Responsible Investment was established to add a new principle of Sustainability to the existing five investment principles – Profitability, Stability, Public Benefit, Liquidity and Independence, in order to continue and expand RI. Legal Basis National Pension Act Article 102 (Fund Management and Investment) ④ Where the Minister of Health and Welfare manages and operates the Fund pursuant to paragraph (2)3, he/she may take into account environmental, social and governance factors related to investment targets, to achieve a long-term and stable and revenue. National Pension Fund Management Guideline Article 4 (Fund Management Principles) 5. Sustainability: Where the Minister of Health and Welfare manages and operates the Fund pursuant to paragraph (2)3, he/she may take into account environmental, social and governance factors related to investment targets, to achieve a long-term and stable and revenue. 3 85 4 4","2020 Responsible Investment \& Governance Report 1-3 Policies on Responsible Investment NPS conducts responsible investment in the best interest of pension participants and beneficiaries to achieve stable growth of assets. NPS adopts Responsible Investment Principles (RI Principles) and Principles on Responsible Investment \& Governance (Stewardship Code), manages the Fund by integrating non-financial factors, such as ESG factors, into investment decisions in accordance with standards, procedures, and process of the Guideline on Responsible Investment \& Governance, and ensures independence and transparency in the process of the exercise of shareholder rights. Policies on Responsible Investment Fund Management Guideline Article 17 (Responsible Investment) ① In the case of administering and managing the Fund through securities trading and/or securities lending, environmental, social and governance (ESG) factors may be taken into consideration in investment decision-making processes in order to achieve stable and higher long-term returns. The principles of Responsible Investment are seen in Table 4. Article 17-2 (Responsible Investment and Governance Principles) NPS shall adopt the Korea Stewardship Code, or Principles on the Stewardship Responsibility of Institutional Investors, and implement the Responsible Investment and Governance Principles approved by the Fund Management Committee, in order to promote transparency and independence of stewardship activities carried out by NPS. Article 17-3 (Responsible Investment and Exercise of Shareholder Rights) ① NPS engages in responsible investment practice and exercises shareholder rights to achieve the stable growth of the assets. ② NPS engages in responsible investment practice and exercises shareholder rights in good faith with a view to the best interest of contributors to pension participants and beneficiaries of the National Pension Plan. ③ NPS engages in responsible investment practice and exercises shareholder rights in a way of amplifying shareholder value. ④ Standards, methodologies and procedures relating to responsible investment and exercise of shareholder right are in line with the “Responsible Investment \& Governance Guidelines” as approved by the Fund Management Committee Stewardship Code, or Principles on Responsible Principles on Responsible Investment (RI) Investment \& Governance (1) Achieve long-term and stable returns (1) Formulate and publicly disclose a policy for implementing (2) Implement RI according to the Guideline on Responsible stewardship responsibilities Investment \& Governance (2) Formulate and publicly disclose a policy for avoiding (3) Implement RI in equities and fixed income investment conflicts of interest (4) Incorporate non-financial factors, including environmental, (3) Regularly monitor investee companies social, and governance, into investment decision (4) Formulate internal guidelines and conduct shareholder (5) Conduct shareholder engagement on investee companies engagement (6) Consider RI when selecting and assessing external (5) Formulate and publicly disclose a voting policy, and managers publicly disclose voting records and reasons for each vote (7) Encourage companies to publicly disclose ESG-related (6) Regularly report stewardship activities information (7) Enhance the capabilities and expertise required to fulfill (8) Improve capabilities and expertise in RI stewardship responsibilities (9) Regularly monitor RI activities Guideline on Responsible Investment \& Governance PART 1 (General Provisions) Objective, scope of application, basic principles, details of stewardship activities, and key decision makers PART 2 (Responsible Investment) Coverage, incorporation of non-financial factors (ESG), incorporation type PART 3 (Exercise of Shareholder Right) - Proxy voting (coverage, basic principles, sub-standards, etc.) - Stewardship activities on Focus Area (Confidential Dialogue, Non-Public/Public Focus List Selection, Open Letter, Shareholder Proposals, etc.) - Stewardship activities on Unexpected Concerns (coverage, compliance standards) PART 4 (Disclosure and Reporting, etc.) Notification and announcement, disclosure and reporting, publication of a report on stewardship activities, internal control, document storage, capability improvement, etc. Attached tables: detailed voting criteria for domestic and global equities, form of voting results to be disclosed and selection criteria for Focus Area 5 86 5 6","2020 NATIONAL PENSION FUND 1-4 Governance Structure and Organization NPS undertakes stewardship activities in line with the policies approved by the Fund Management Committee (FMC), the highest decision-making body in NPS. The Special Committee on Responsible Investment \& Governance under the FMC, consisting of full-time experts and external experts, makes decisions on responsible Investment, as well as reviews and approves key matters relating to ESG investing and the exercise of shareholder rights. Responsible investment is conducted by the Global Responsible Investment \& Governance (GRI\&G) Division under the Managing Director of Investment Strategy and Responsible Investment \& Governance at NPSIM. The GRI\&G consists of the Responsible Investment Team and the Corporate Governance Team with 13 members as of the end of 2020. The Responsible Investment Team supports the development of policies and guidelines relating to responsible investment, and establishes responsible investment strategies and action plans to support in-house portfolio managers in incorporating ESG factors into investment decisions. To this end, ESG Evaluation is carried out internally; researches are undertaken, including monitoring ESG-related controversial issues; ESG-related active ownership is conducted. In addition, the Corporate Governance Team supports the development of policies and guidelines on the exercise of shareholder rights, and formulates action plans. Moreover, the team undertakes research on corporate governance, exercises shareholder rights, and engages with companies on focus areas. Governance Structure and Organization for Stewardship Activities •Role: Decide key policies on stewardship activities Ministry of Health Fund Management • Members: 20 members, including six ex officio members (incl. Minister of Health and Welfare Committee and Welfare as chair) and 14 appointed representative of each interest group •Role: Review agendas to be proposed to the FMC in advance Practice Evaluation Committee • Members: 20 members, including six ex officio members (incl. Vice Minister of Health and Welfare as chair) and 14 appointed representative of each interest group Special Committee on Responsible Investment \& Governance • Role: Review and decide upon key matters relating to stewardship activities Special Committee Special Committee - Review principles and standards of responsible Special Committee investment and active ownership on Investment on Responsible on Risk Management, Policy Investment \& Performance \& - Decide upon matters relating to active ownership Governance Compensation - Review matters relating to responsible investment • Members: 9 members, including three full-time experts and six external experts Responsible Investment Team • Support the development of policies and guidelines on responsible investment National National Pension Service Pension Service Investment Management • Develop responsible investment strategies •Support the implementation of responsible investment • Conduct research on responsible investment •Engage with companies on unexpected concerns Investment Strategy and • Issue an annual Responsible Investment \& Governance Responsible Investment \& Governance Report Corporate Governance Team Global Responsible Investment \& Governance • Support the development of policies and guidelines on Division the exercise of shareholder rights • Undertake research on corporate governance •Establish action plans to exercise shareholder rights • Exercise voting rights on local and foreign listed stocks Responsible Corporate Investment Team Governance Team •Engage with companies on Focus Areas • Disclose activities relating to shareholder engagement 5 87 6 6","2020 Responsible Investment \& Governance Report Fund Management Committee Meeting Agendas on Responsible Investment for 2020 No Date Agenda 1 Feb. 5 Proposal of the amendments to the Fund Management Guideline 4 Apr. 17 Report on roles and responsibilities of full-time experts and ways to provide information 7 Jul. 3 Report on the Guideline on Stewardship Activities for Domestic Equities Report on the Standards of the Structure and Operation of the Board of Investee Companies 8 Jul. 31 Publication of Annual Report on Responsible Investment \& Governance Special Committee on Responsible Investment \& Governance Meeting Agendas for 2020 No Date Agenda Report on the Guideline on Stewardship Activities for Domestic Equities 1 Jan. 6 Proposal of ways to review voting right delegation to external managers 2 Jan. 20 Decision on whether to make improvements on companies in focus list and to proceed with active ownership Public disclosure according to the amendments to Enforcement Decree of the Financial Investment Services and Capital Markets Act 3 Feb. 25 Report on companies subject to voting right delegation Report on the standards of the application of remuneration cap for directors Report on follow-up measures for revised focus areas Proposal of the selection of non-public focus list and Assessment of companies subject to confidential dialogue in 4 Mar. 2 relation to dividend policy 5 Mar. 6 Decision on withdrawal of delegated voting rights Proposal of the selection of non-public focus list and Assessment of companies subject to confidential dialogue in relation to repetitive vote-against 6 Mar. 13 Proposal of the selection of non-public focus list and Assessment of companies subject to confidential dialogue in relation to remuneration cap for directors Proposal of the selection of non-public focus list and Assessment of companies subject to confidential dialogue in relation to repetitive vote-against Proposal of the selection of non-public focus list and Assessment of companies subject to confidential dialogue in relation to violation of law Proposal of the selection of non-public focus list and Assessment of companies subject to confidential dialogue in relation to remuneration cap for directors Proposal of considerations in exercising voting rights for agenda of general meeting of shareholders of KB Financial Group 7 Mar. 19 Proposal of considerations in exercising voting rights for agenda of general meeting of shareholders of Shinhan Financial Group Proposal of considerations in exercising voting rights for agenda of general meeting of shareholders of Woori Financial Group Proposal of considerations in exercising voting rights for agenda of general meeting of shareholders of Hana Financial Group Proposal of considerations in exercising voting rights for agenda of general meeting of shareholders of Mando Proposal of considerations in exercising voting rights for agenda of general meeting of shareholders of Halla Holdings Proposal of considerations in exercising voting rights for agenda of general meeting of shareholders of Hyosung Holdings Proposal of considerations in exercising voting rights for agenda of general meeting of shareholders of Hanjin KAL 8 Mar. 26 Proposal of considerations in exercising voting rights for agenda of general meeting of shareholders of Korean Air Proposal of considerations in exercising voting rights for agenda of general meeting of shareholders of KT\&G Proposal of a Guideline on desirable structure and operation of the Board 9 Apr. 29 Proposal of ways to assign additional points when selecting and assessing external mangers Report on the result of NPSIM’s proxy voting Proposal of an Annual Report on Responsible Investment \& Governance 10 May. 22 Report on the status of responsible investment of NPSIM and amendments to the Guideline on Stewardship Activities Proposal of the standards of public disclosure for change in the purpose of holding stocks 11 Jun. 22 Review on change in the purpose of holding stocks of Hanjin KAL 7 88 7 8","2020 NATIONAL PENSION FUND No Date Agenda Proposal of the selection of non-public focus list and Assessment of companies subject to confidential dialogue in relation to dividend policy Proposal of the selection of companies subject to confidential dialogue in relation to dividend policy Proposal of the selection of companies subject to confidential dialogue in relation to remuneration cap for directors 12 Jul. 16 Proposal of the selection of companies subject to confidential dialogue in relation to violation of law Proposal of the selection of companies subject to confidential dialogue in relation to repetitive vote-against Proposal of the selection of companies subject to stewardship activities and report on the result of monitoring on unexpected concerns in the first half of 2020 Materiality assessment procedures and standards in relation to unexpected concerns Selection of companies subject to materiality assessment in relation to unexpected concerns Report on the result of ESG Evaluation for the first half of 2020 13 Sept. 11 Proposal of the selection of companies subject to confidential dialogue in relation to drop in regular ESG Evaluation Proposal of additional selection of companies subject to confidential dialogue in relation to violation of law Proxy voting exercised by NPSIM Report on NPSIM’s stewardship activities and the result of periodic review of voting right delegation Proposal of considerations in exercising voting rights for agenda of an extraordinary meeting of shareholders of SGC 14 Sept. 24 Solutions Proxy voting exercised by NPSIM 15 Sept. 25 Report on NPSIM’s stewardship activities and the result of periodic review of voting right delegation Proposal of considerations in exercising voting rights for agenda of an extraordinary meeting of shareholders of LG Chem Proposal of the selection of non-public focus list and Assessment of companies subject to confidential dialogue in relation to degraded results of ESG Evaluation 16 Oct. 27 Decision on the standards of withdrawal of delegated voting Proposal of the selection of companies subject to confidential dialogue in relation to unexpected concerns Responsible investment report for externally managed domestic equities Proposal of the selection of companies subject to confidential dialogue in relation to violation of law Proposal of the selection of companies subject to materiality re-assessment in relation to unexpected concerns Proposal of the selection of companies subject to materiality assessment in relation to unexpected concerns 17 Nov. 9 Proposal of the standards of public disclosure for change in the purpose of holding stocks Discussion on ways to apply history, including damage to corporate value, to proxy voting Guideline on ESG Integration Strategies Proposal of considerations in exercising voting rights for agenda of an extraordinary meeting of shareholders of KB 18 Nov. 17 Financial Group Proposal of the selection of companies subject to confidential dialogue in relation to unexpected concerns Proposal of the selection of companies subject to materiality re-assessment in relation to unexpected concerns Proposal of the selection of companies subject to materiality assessment in relation to unexpected concerns Interim report on the recommendation of outsider directors and auditors 19 Dec. 8 Guide to the Structure and Operation of the Board of Investee Companies Report on NPSIM’s stewardship activities and the result of periodic review of voting right delegation Discussion on ways to apply history, including damage to corporate value, to proxy voting Report on the standards of change in the purpose of holding domestic equities 7 89 8 8","2020 Responsible Investment \& Governance Report 1-5 Milestones of Stewardship Activities After the launch of externally managed domestic responsible investment (RI) funds in September 2006, NPS joined the Principles for Responsible Investment (PRI), a global initiative for responsible investment, in June 2009. In March 2013, Responsible Investment team was created under the Investment Strategy Division to facilitate responsible investment activities by integrating proxy voting functions which used to be performed in various equity management departments. In 2015, NPS set a plan to promote engagement with domestic listed companies with an aim of developing a reasonable dividend policy. In November in the same year, NPS established an ESG Evaluation System for domestic equities, and built an internal IT system that provides ESG related information to its portfolio managers. In July 2018, NPS adopted the Responsible Investment \& Governance Principles, or Stewardship Code. Accordingly, the Responsible Investment team was expanded and reformed into the Global Responsible Investment \& Governance Division (Responsible Investment Team, Corporate governance Team) in January 2019. In November in the same year, NPS mapped out a Plan to Facilitate Responsible Investment to promote responsible investment throughout the entire portfolio, while formulating the Guideline on Active Ownership for Domestic Equities in December to expand the scope of shareholder engagement. In July 2020, an Annual Report on Responsible Investment \& Governance was published to publicly disclose Responsible Investment \& Governance carried out by NPS, and in November, the Guideline on ESG Integration Strategies for Domestic Equities was developed to incorporate new ESG strategies into internally managed domestic equities. Milestones of Stewardship Activities Sept. 2006 Launched externally-managed domestic RI funds Jun. 2009 Joined the Principles for Responsible Investment (PRI) Dec. 2009 Added a provision relating to responsible investment in Voting Guidelines Mar. 2013 Established the Responsible Investment Team under the Investment Strategy Division Developed a plan to promote engagement with domestic listed companies on dividends from domestic Jun. 2015 equities Introduced new benchmarks for externally-managed domestic RI funds Nov. 2015 Established an ESG Evaluation System for domestic equities Added a provision relating to responsible investment in the Fund Management Guideline Apr. 2016 (Investment Policy Statement) Dec. 2016 Built an ESG System for domestic equities Jul. 2017 Established an Evaluation System to assess ESG Controversial Issues for domestic equities Sept. 2017 Incorporated ESG factors into investment decision in internally-managed domestic equities Introduced the Responsible Investment \& Governance Principles (Stewardship Code) Jul. 2018 Established the Guideline on Responsible Investment \& Governance by amending Voting Guidelines Expanded and reformed the Responsible Investment Team into the Global Responsible Jan. 2019 Investment \& Governance (Responsible Investment Team, Corporate Governance Team) Developed the Guideline on Stewardship Activities for Domestic Equities Feb. 2019 Decided on the scope of disclosing voting directions prior to shareholder meetings Joined the International Corporate Governance Network (ICGN) Sept. 2019 Joined the Asian Corporate Governance Association (ACGA) Developed the Plan to Facilitate Responsible Investment and adopted RI Principles Added a principle of Sustainability in the Investment Principles Nov. 2019 Developed the Guideline on Voting Right Delegation to External Managers Developed plans to add additional points to external managers in relation to stewardship activities in the selection and evaluation process Dec. 2019 Developed the Guideline on Active Ownership for Domestic Equities Issued an Annual Report on Responsible Investment \& Governance Jul. 2020 Amended the Guideline on Stewardship Activities for Domestic Equities Developed the upgraded standards of the materiality assessment process and its assessment standards Sept.2020 in relation to unexpected concerns Developed the Guideline on ESG Integration Strategies for Domestic Equities Nov.2020 Joined the Asian Investor Group on Climate Change 9 90 9 10","2020 NATIONAL PENSION FUND 2. Implementation of Responsible Investment 2-1 ESG Integration NPS has paved the way towards implementing responsible investment (RI) strategies for a long period of time. Since the commencement of external investments in RI funds in September 2006, NPS has laid the foundation for adopting ESG integration strategies by developing an internal ESG research scheme and ESG-related strategies, and has applied the strategies to internally managed domestic equities and externally managed domestic RI funds. In line with the Plan to Facilitate Responsible Investment approved by the FMC in November 2019, NPS remains committed to expanding the application of ESG integration strategies throughout the entire portfolio, and gradually increase RI through the integration of ESG strategies into external management. ESG Integration Strategies are designed to realize through ESG Evaluation. NPS conducts the ESG Integration Strategies by incorporating ESG factors, coupled with financial factors, into investment decision-making processes for internally managed domestic equities by developing an ESG Evaluation system and internal systems. ESG Evaluation \& ESG Integration Process ESG Evaluation ESG Integration Periodic Periodic ESG Evaluation Consider ESG factors • Conduct ESG evaluation on listed domestic in its investment stocks (KOSPI \& KOSDAQ100) decision-making process Internally Managed • Conduct it twice a year Domestic Equities ESG System (Active / Passive) ESG Controversial Issue Monitoring \& Frequently Materiality Assessment • Reflect ESG controversial issues into ESG risk ratings (1) Periodic ESG Evaluation In order to analyze non-financial factors, or ESG factors, in a systematic manner, NPS has formed its own ESG Evaluation System and conducted evaluations on domestic listed companies (KOSPI+KOSDAQ100) twice a year. The ESG Evaluation System is comprised of 52 evaluation indicators in 13 issues affecting corporate values in the areas of environmental, social, and governance (ESG). Each issue is scored and graded for ESG rating after being weighted differently for each industry. 10 10 9 91","2020 Responsible Investment \& Governance Report ESG Evaluation System on Domestic Equities Issue ESG Indicator Climate Change Greenhouse Gas Emission Management System, Carbon Emission, Energy Consumption Clean Production Management System, Water Consumption, Chemical Consumption, Air Environ Clean Production mental Pollution, Waste Emission Green Products Eco-friendly Production, Eco-friendly Patents, Eco-friendly Certification, Product Improvements Development Human Resources Wage, Fringe Benefit, Employment, Organizational Culture, Employment Tenure, Human Rights, Management Labor Customs Health \& Safety System, Certification on Health \& Safety Management System, Industrial Industrial Safety Accident Frequency Contract Process, Compliance Program on Fair Trade, Contractor Support Activities, Subcontract Social Subcontracting Act Compliance Product Safety System, Product Safety Management System Certification, Product Safety Product Safety Accident Fair Competition Internal Transaction Committee, Fair Trade Limit Activities, Information Protection System, and Social Endowment Development Shareholder Rights Poison pill, Shareholder Opinion Convergence, Notice of Shareholder Meeting Board Structure and CEO \& BOD Chair Separation, BOD Independence, Outside Director Composition, BOD Activities, Activities Compensation Committee, Director Remuneration Policy Governance Audit System Outside Director Ratio of Audit Committee, Extended Tenure Auditor Ratio, Audit to Non-Audit Service Ratio Affiliation Risk Affiliation Contingent Liability to Net Assets, Affiliation Sales Ratio, Affiliation Purchase Ratio Shareholder Return Ratio, Total Shareholder Return, Recent 3 Years Dividend, Insufficient Dividend Dividend Payout As of the end of 2020, NPS conducted an ESG Evaluation on 908 listed companies in Korea and graded them in the following six ESG ranking. 2020 ESG Evaluation Result AA A BB B C D Total 74 145 192 243 187 67 908 (8.1%) (16.0%) (21.1%) (26.8%) (20.6%) (7.4%) (100.0%) ESG information, including ESG Evaluation results, is provided via to portfolio managers through the ESG System to integrate non- financial factors, along with financial factors, into investment decision of domestic equity assets. If a company falls below a certain ranking in a regular ESG Evaluation process, qualitative assessment is taken to conduct stewardship activities when appropriate. In the second half of 2020, NPS undertook a commissioned research on Improvement of ESG Evaluation System for Domestic Equities and Establishment of ESG Evaluation System for Fixed Income Investments to seek ways to enhance the ESG Evaluations system for domestic equities and develop an ESG Evaluation system for fixed income investments. Based on these researches, NPS plans to upgrade the ESG Evaluation system for domestic equities and introduce the ESG Evaluation system for fixed income investments in 2021. In addition, NPS remains committed to building up and advancing ESG evaluation systems, including evaluation indicators, given a wide range of external and internal factors. 92 11","2020 NATIONAL PENSION FUND (2) ESG Controversial Issue Monitoring and Materiality Assessment NPS monitors ESG-related matters which can affect corporate value in accordance with the Stewardship Code and the Guideline on 1) 2) Responsible Investment \& Governance, and conducts materiality assessments, mainly for materiality and recurrence , to measure possible impact on corporate value and shareholder value. Taking into consideration the result of materiality assessments as well as ownership ratio and holding weight, NPS adjusts ESG evaluation results or takes shareholder engagement. In case that an investee company is subject to ‘shareholder engagement for unexpected concerns,’ the company is likely to be invited to a confidential dialogue according to the process and standards of the Guideline on Stewardship Activities for Domestic Equities. Details of shareholder engagement for unexpected concerns are described in the 2-3. Shareholder Engagement. In 2020, NPS conducted materiality assessments on 34 ESG-related issues. Among them, one company’s ESG evaluation result was adjusted, and the result was provided to portfolio managers of internally managed domestic equities. (3) ESG Integration Since 2017, NPS has adopted ESG integration strategies for some internally managed domestic equities (active-type). In November 2020, NPS expanded its strategies into passive investments and formulated the Guideline on ESG Integration Strategies for Domestic Equities which describes enhanced measures to implement. As such, NPS applies ESG integration strategies into all of the internally managed domestic equities. Accordingly, in-house portfolio managers check ESG-related details when considering new securities. If ESG rating falls into low categories, portfolio managers are required to add their opinion and ESG reports as attachments of a security review report. In addition, as for securities falling into Level C, portfolio managers are required to check if the investments meet their weights relative to their benchmark. If investments are made beyond their benchmark, portfolio managers are required to add the reason and investment opinion in writing in a security review report. (4) Externally Managed Domestic RI funds NPS manages externally managed domestic RI funds as one of the externally managed domestic equities. As of the end of 2020, RI funds were managed by nine external managers, and the amount under management amounted to approximately KRW 8 trillion. NPS introduced an internally developed benchmark index for such RI funds, which is called NPS-FnGuide Responsible Investment Index. In selecting external managers, a range of aspects are considered, including their expertise, ethics, investment strategies, investment process, and compliance with investment guidelines. Once selected, external managers are allowed to implement a range of RI investment strategies. Since November 2020, external RI managers have been required to submit RI fund management reports, which are used to monitor such investments by NPS. ESG Investing: Domestic Equities (Unit: KRW in trillion) 93.4 83.3 71.6 58.8 60.7 50.1 8.0 22.2 4.6 27.0 5.2 93.4 [9.6%] [37.8%] [9.2%] [37.7%] [8.6%] [100%] Internally Externally Internally Externally Internally Externally 2018 2019 2020 Responsible Investment Internal management in total External management in total 1) The size of the damage, probability of punishment of its level, and the duration of damage are considered. 2) Engagement in communication, improvement level, and frequency are considered. 93 12","2020 Responsible Investment \& Governance Report 2-2 Proxy Voting (1) Standards and Procedures NPS exercises voting rights for retained listed stocks in good faith and in the best interests of pension participants and beneficiaries according to the National Finance Act and the Fund Management Guideline. Also, NPS complies with the Guideline on Responsible Investment \& Governance which defines standards, procedures, and practices on voting while referring to advice from external experts to exercise voting rights in a more professional and faithful manner. Proxy Voting Procedures Corporate Approval by reporting at Compliance Investment Notification to Disclosure of voting shareholder Agenda analysis review Committee custodian banks results meetings (or CIO) If it decides that it is difficult to exercise voting rights If more than a third of the members or a chair of the Special Committee Special Committee on Responsible Investment \& Governance makes a request on Responsible Investment \& Governance Based upon ownership ratio and holding weight, the Investment Committee reviews and approves the exercise of voting rights. However, the Special Committee on Responsible Investment \& Governance may decide the direction of voting in certain cases: i) where NPS deems it difficult to make a decision, or ii) where over a third of the committee's registered members deem it to have a long-term impact on shareholder values. Moreover, at an annual shareholder meeting in March 2020, the Fund Management Committee (FMC) decided to delegate voting rights of some holdings to external managers by formulating the Guideline on Voting Right Delegation to External Managers. (2) Disclosure and Voting Status NPS discloses reasons for voting against proposals in detail, containing voting results and supporting clauses under applicable guidelines within 14 days after a shareholder meeting. Nevertheless, voting direction can be disclosed before a shareholder meeting when i) NPS holds stocks in excess of 10%, ii) associated stocks account for more than 1% of investment portfolio, or iii) the Special Committee on Responsible Investment \& Governance deems it necessary. Accordingly, NPS made prior disclosures for 123 proposals in 2020. NPS voted on 3,397 agenda in 854 shareholder meetings for domestic equities in 2020. 94 13","2020 NATIONAL PENSION FUND Voting Status 6 [0.2%] 8 [0.2%] 535 [16%] 625 [19%] For 2019 2020 Against Total 3,278 Total 3,397 Abstentions/Non-votes 2,854 2,647 [84%] [81%] Vote-Against Status 37 Appointments of [6%] 98 directors and auditors [18%] Amendments to 251 245 articles of incorporation 242 2019 [40%] 2020 [46%] Approval of remuneration [39%] Total 625 155 Total 535 cap for directors [29%] Others 95 37 [15%] [7%] Voting Cases in 2020 ① Approval of Financial Statement NPS voted FOR a financial statement of Company A considering the characteristics of the company and industry which have low dividend payout ratios but require intensive capital investment instead of paying dividends. On contrary, NPS voted AGAINST a financial statement of Company B considering its low dividend payout ratio and the absence of dividend policies even in good fiscal conditions in March 2020. Meanwhile, NPS agreed with a shareholder proposal for the approval of a financial statement (incl. statement of appropriation of retained earnings) of Company C considering its financial stability, cash holding, free cash flow, and comparison with other companies in the same industry. ② Appointment of Directors and Auditors (Supervisors) In March 2020, NPS voted AGAINST appointment of an outside director at Company D where NPS holds more than 5% of its assets; appointment of a full-time employee at Company E as the employee worked for a key business partner company over the last five years; appointment of a full-time employee at Company F as the employee was under a long-term contract as advisor of the company over the last five years. In addition, NPS voted AGAINST appointment of an inside director at Company G as the director was held guilty by the supreme court, harming shareholder interests and damaging corporate value; appointment of an inside director at Company H due to the employee's negligence of duties to oversee corporate value or shareholder rights when the largest shareholder was engaged in embezzlement. ③ Amendment to Articles of Incorporation In March 2020, NPS voted AGAINST amendments to articles of incorporation for the following cases: concerns over damage to corporate value due to the introduction of a supermajority voting provision (Company I), change in an approval authority for a financial statement by a resolution of the board of directors at a shareholder meeting without justifiable grounds (Company J), and change in an approval authority for provision of money for merit by a resolution of the board of directors at a shareholder meeting without justifiable grounds (Company K). ④ Approval of Remuneration Cap for Directors In March 2020, NPS voted AGAINST remuneration cap for a director of Company L due to its excessive remuneration relative to the company’s performance, and voted FOR remuneration cap for a director of Company M as the company submitted supporting documents including one-off costs. 95 14","2020 Responsible Investment \& Governance Report 2-3 Shareholder Engagement NPS has adopted the Responsible Investment \& Governance Principles (Stewardship Code) to fulfill its fiduciary duty to improve long-term profitability and stability while enhancing independence and transparency in the exercise of shareholder rights. Through this Code, the scope of shareholder engagement has been expanded to an extent to address director remuneration cap and legal violation. NPS undertakes shareholder engagement in accordance with standards and procedures of the Guideline on Stewardship Activities for Domestic Equities. Meanwhile, when introducing the Stewardship Code, NPS first conducted shareholder activities which are not directly involved in business management given concerns over potential intervention and a return of short-term gains on trading. In principle, 3) engagement in business management is not permitted unless various conditions met; however, NPS is allowed to engage in business management for issues approved by the FMC. A case in point is a shareholder proposal for limiting the rights of some 4) directors of Hanjin KAL in February 2019 based on concerns over degraded corporate value due to deviant behaviors of some members of the owner family of Korean Air and Hanjin KAL. Moreover, in line with increasing call for transparency and alleviate concerns over intervention in business management and infringement of autonomy, NPS established the Guideline on Active Ownership in December 2019 that defines principles, standards and procedures for active shareholder engagement. NPS remains committed to conducting shareholder engagement according to guidelines and guidance and by doing so, NPS aims to encourage companies to voluntarily establish their own measures to improve shareholder value. (a) Shareholder Engagement for Focus Area With an aim of achieving long-term and stable returns, NPS identifies key focus areas and conducts shareholder engagement. Key focus areas include a dividend policy, the remuneration caps for directors, and concerns over violation of law, repetitive vote- against, and downgraded results of ESG evaluations. Shareholder engagement for focus area is undertaken in stages, including selections of focus list, confidential dialogue, non- public/public focus lists, and shareholder proposals according to the Guideline on Stewardship Activities for Domestic Equities. If a company fails to show improvement even after a series of shareholder engagement, NPS can vote against any relevant agenda or appointment of directors in the company’s shareholder meeting, or send an open letter. Shareholder Engagement for Focus Areas No improvement No improvement No improvement Active Confidential made after one- Non-Public made after one- Public made in the end Ownership Dialogue year dialogue Focus List year dialogue Focus List of a selected year (Shareholder proposal, etc.) Improved Improved Improved ※ Decided by the FMC Dialogue Closed ※ Company selection and improvement decision made by the Special Committee on Responsible Investment \& Governance 3) It refers to a shareholder right that virtually influences the company on matters including election of directors and other related shareholder proposals. 4) As per the decision by the FMC, NPS presented a shareholder proposal in compliance with the procedures, but it was rejected in the annual shareholder meeting of Hanjin KAL in March 2019, with 48.66% voting for and 51.34% voting against. 96 15","2020 NATIONAL PENSION FUND Focus Area Selection Standard Establishment of In case a company fails to establish a reasonable dividend policy or pay out dividends accordingly dividend policy Reasonableness of In case a shareholder right is likely to be infringed as a remuneration cap for directors is not remuneration caps for directors aligned with business performance and compensation. In case a company falls into the following categories based on objective facts, such as Issues hindering corporate investigations by authorities, value or shareholders’ interest due to concerns ① Embezzlement or breach of duty in relation to the company ② Provision of unfair support to a special-interest party or other companies (unfair support) over violation of law ③ Activities causing unfair gains to a special-interest party (shareholders’ proportionate interests) Repetitive In case a company fails to show improvement despite NPS’s repetitive vote-against decisions in votes-against agenda the company’s shareholder meeting. Issues downgrading the results In case ESG ranking declines to below grade C after dropping two grades or more of ESG evaluations ① Establishment of Dividend Policy NPS selected a list of companies required for confidential dialogue among companies that have not established and publicly disclosed reasonable dividend policy, or payed out dividend accordingly. In 2020, NPS communicated with 31 companies through letters or dialogues. By establishing an amicable communication channel, NPS encouraged companies to set out dividend policies voluntarily and communicate with the market, rather than just presenting a dividend ratio or level. As a result, the companies disclosed a reasonable dividend policy through a local electronic disclosure system, Data Analysis, Retrieval \& Transfer (DART) of Financial Supervisory Service (FSS), and its website. This has led to an increase in the predictability of dividend payouts for investors. NPS held confidential dialogue with representatives of companies (Company M and Company N), including the board of directors and management, to share the procedures and intention of NPS’s shareholder engagement, particularly for the establishment of the dividend policy. The companies understood the necessity for developing a dividend policy. As a consequence, Company M decided to allocate a certain percentage of its operating profits to shareholders and retain the remaining internally to improve its competitiveness through reinvestment. The company has executed its dividend policy to maximize values of stakeholders. Company N publicly disclosed its standards of calculating the dividend amount in detail, along with its effort to pay out dividends at a fixed rate under certain circumstances, such as no dramatic volatility in the business environment and to escalate the dividend payout ratio in stages. As such, the disclosure of dividend policies helps investors better understand the companies’ decision-making process for dividends and paves the way for enhancing the predictability of dividend payouts. 97 16","2020 Responsible Investment \& Governance Report ② Reasonableness of Remuneration Caps for Directors NPS selected companies subject to confidential dialogue in consideration of actual remuneration relative to remuneration cap. The selection was made among companies NPS voted against proposals of ‘Approval of Remuneration Cap for Directors’ at recent shareholder meeting with the reasons of the remuneration cap not in line with business performance or excessive relative to actual remuneration. In 2020, NPS held confidential dialogue with and sent official letters to 12 companies, established an amicable communication channel, and encouraged them to establish measures to improve shareholder value. As a consequence, the companies voluntarily made improvements in making remuneration cap reasonable by establishing a Compensation Committee and adjusting remuneration cap. NPS held confidential dialogue with representatives of companies, including the board and management, as to agendas relating to concerns over a larger gap between remuneration cap and actual remuneration, as well as NPS’s shareholder engagement process and intention in relation to remuneration caps for directors. The companies acknowledged and understood the intention of confidential dialogue and investors’ concerns. As a result, the board of Company O approved the establishment of a Compensation Committee within the board and the enactment of an Operation Regulation to improve shareholder value and increase transparency in business management. The Compensation Committee of Company R voluntarily made improvements by adjusting excessive remuneration relative to actual remuneration through discussions. mpany R voluntarily made improvements by adjusting excessive remuneration relative to actual remuneration through discussions. ③ Issues Possible to Damage Corporate Value or Shareholders’ Interests NPS selected companies subject to confidential dialogue with concerns over potential damage to shareholder value or violation of shareholder rights caused by embezzlement, breach of duty, unfair support practices, or shareholders’ proportionate interests on the basis of investigations by authorities or law enforcement. In 2020, NPS held confidential dialogue with and sent official letters to 25 companies, established an amicable communication channel, and encouraged them to establish measures to improve shareholder value. NPS held confidential dialogue with the management and the board of Company P to examine factual grounds, countermeasures, and improvement measures on concerns over violation of laws, and share NPS’s shareholder engagement intention and procedures in relation to shareholders’ proportionate interests. As a result, Company P made improvements by seeking measures at shareholder meetings and enhancing a related sub-committee under the board. In early 2020, the company was lifted from a non-public dialogue list. 98 17","2020 NATIONAL PENSION FUND ④ Repetitive Vote-Against Agenda NPS selected companies subject to confidential dialogue given the number of voting against, room for improvement, ownership ratio, etc., among companies where NPS exercised voting against proposals of appointment of directors and auditors (supervisors) more than two time with the same reason over the last five years. In 2020, NPS held confidential dialogue with and sent official letters to 11 companies to build consensus on rule-violating practices against the Guideline of Stewardship Activities and encouraged them to establish measures to improve shareholder value. As a result, those companies showed improvement in implementing the corrective measures. NPS held confidential dialogue with the management and the board of companies receiving repetitive vote-against proposals and shared the procedures and intention of NPS’s shareholder engagement: Company Q for appointing a former director of a key shareholder company as an outside director and Company R for an inside director holding excessive posts outside the company. The companies acknowledged and understood the intention of confidential dialogue through sufficient communication. As a result, Company Q and Company R made improvements by removing the director in question from a candidate list for the post of a board director (Company Q) and reduce the number of posts permitted to hold outside the company (Company R). ⑤ Issues Downgrading the Results of ESG Evaluations NPS selected companies subject to confidential dialogue based on quantitative analysis in NPS’s asset exposure and the reason of drop in ranking, among internally managed domestic equities companies whose ranking dropped more than two levels to below Grade C in an ESG Evaluation. In 2020, NPS held confidential dialogue with and sent official letters to one company, established an amicable communication channel, and encouraged the company to establish measures to improve shareholder value. As a consequence, the company made improvements in enhancing its disclosure, establishing countermeasures, and implementing the measures. NPS selected Company S as a company subject to confidential dialogue in relation to degraded ESG ranking, and held confidential dialogue for around one year with representatives of the company, such as the board and management, of the company. During the dialogue, NPS shared the procedures and intention of NPS’s shareholder engagement and described the reason of being selected, while Company S acknowledged and understood the intention of confidential dialogue, and established and implemented countermeasures. Specifically, the company added an environmental management section in its website, strengthening the disclosure of environmental and social information, such as energy consumption data and safety-related information, and established procedures to secure product safety. In addition, the Board approved a proposal of newly launching and operating of an Outside Director Nomination Committee and made related regulations. 99 18","2020 Responsible Investment \& Governance Report (b) Shareholder Engagement for Unexpected Concerns To improve shareholder value and long-term returns, NPS seeks shareholder engagement in unexpected concerns in relation to environmental, social and governance (ESG) that may harm corporate value or shareholder interests. According to the Guideline on Stewardship Activities, NPS takes action in stage: conducting materiality assessments on companies with ESG controversial 5) issues , selecting companies subject to confidential dialogue, and making a shareholder proposal. If no improvement is made even after a series of shareholder engagement, NPS exercises voting rights at shareholder meetings. If no willingness is shown for making improvements, including refusing confidential dialogue, NPS may send an open letter. Shareholder Engagement for Unexpected Concerns No improvements made after Materiality Assessment on Selected Confidential Dialogue one-year dialogue Active Ownership ESG Controversial Issues (Shareholder proposal, etc.) Improved ※ Decided by the FMC Dialogue Closed ※ Company selection and improvement decision made by the Special Committee on Responsible Investment \& Governance Confidential Dialogue for Unexpected Concerns (Concerns over Product Safety) To address concerns over product safety accidents causing massive human casualty, NPS held confidential dialogue with and sent letters to investee companies which manufacture or distribute products, including Company T, in order to minimize any risks which have adverse impact on shareholder value. Through these efforts, NPS examined fact relevance and countermeasures in place, established policies to avoid the recurrence of the same accidents, developed human resources and physical systems, and encouraged the companies to publicly disclose related information. As a result, manufacturing companies established policies to strengthen the control of hazardous chemical substances, developed infrastructure necessary to prevent the same incident from occurring, including building related systems and expanding the organization, newly created a committee within the board, and enhanced reporting process. In the case of distributing companies, they reinforced the validation of product safety, conducted assessments on private-label products by a third-party agency, and disclosed all components of products with risk concern on their websites. In addition, NPS held confidential dialogue with and sent letters to companies which underwent investigations by authorities on the incident in 2019, and continues to monitor such companies. (Concerns over Industrial Safety) Since 2016, NPS has held confidential dialogue with and sent letters to Company U where casualties constantly occurred due to occupational diseases. Through these efforts, NPS examined fact relevance and countermeasures in place, established measures to protect the safety and health of the employees, and encouraged the company to publicly disclose related information. In 2018, the company made a formal apology, formulated measures to compensate associated employees, followed recommendations of a third- party agency consisting of experts in a range of fields, including industrial safety and health and preventive medicine, and continued to make improvements. In 2020, NPS sent 35 letters to companies on various ESG controversial issues and conducted materiality assessments. The issues included ESG-related investigations by authorities, violation of environmental laws, casualty occurring in workplace, etc. Based on the result of the materiality assessments and letters, no company was selected as a company subject to confidential dialogue. NPS continues to monitor ESG-related controversial issues in investee companies. 5) Controversial Issues refer to a set of issues or scandals that have an impact on corporate value. 100 19","2020 NATIONAL PENSION FUND (c) Active Ownership In December 2019, NPS established the Guideline on Active Ownership to enhance corporate value and provide transparent and fair shareholder engagement. In this guideline, active ownership focuses on increasing values of investee companies and shareholders by involving in sufficient interaction and communication on key focus areas and unexpected concerns as well as seeking improvement plans, rather than engaging in business management of investee companies. When an issue requiring shareholder engagement occurs, NPS pursues fact-checking and communication with investee companies to address issues according to the Guideline on Stewardship Activities for Domestic Equities. In case that it seems hard to make improvement, an 'Active Ownership Engagement’ is conducted. Active Ownership Activities Activities • Companies which fail to make improvements, among companies either on a public focus list or in Target Company confidential dialogue for unexpected concerns • Engagement standard is established on a case-by-case basis by considering a range of factors including Engagement Standard industrial characteristics, internal conditions, feasibility of a shareholder proposal, cost-effectiveness, and implications for the market • The Special Committee on Responsible Investment \& Governance decides companies with no improvements made, and reviews the need for a shareholder proposal and its contents, and reports it to Selection Process the FMC. - The FMC makes an actual decision on a shareholder proposal based on the review from the committee. • The FMC makes a final decision on the contents of a shareholder proposal within an acceptable range of Shareholder Proposal the Commercial Code and the Financial Investment Service and Capital Market Act. (d) Litigation NPS may file a claim, such as shareholder derivative suit or compensatory damage suit, with a view to creating more long- term shareholder value of investee companies, according to the Guideline on Stewardship Activities for Domestic Equities. NPS does not file a claim for the purpose of exercising influence over investee companies or directors nor living up to the request of other shareholders. Even if conditions are met for litigation, NPS takes legal action only when it deems that the legal action can contribute to enhancing shareholder value over a long-term horizon considering the possibility to win and costs relative to benefits. 101 20","2020 Responsible Investment \& Governance Report 3. Global Investor Network In June 2009, NPS joined the Principles for Responsible Investment (PRI) , a global network of investors that have publicly 6) demonstrated their commitment to responsible investment. Since 2016, NPS has submitted PRI Transparency Reports. In order to enhance the capabilities and implement stewardship activities in line with the launch of the Stewardship Code, NPS joined two investor-led organizations dedicated to corporate governance and investor stewardship: International Corporate 7) Governance Network (ICGN) and Asian Corporate Governance Association (ACGA) in September 2019. Moreover, NPS joined 8) 9) the Asia Investor Group on Climate Change (AIGCC) , an initiative to create awareness and encourage action among Asia’s asset owners and financial institutions about the risks and opportunities associated with climate change and low carbon investing in November 2011. Capitalizing on researches, best practices, and guidelines from ICGN, ACGA, and AIGCC, NPS remain committed to boosting its capability and expertise in environmental, social, and governance (ESG) and expanding its network with asset managers and global pension funds. Global Network for Responsible Investment 6) The Principles for Responsible Investment (PRI) is a global initiative launched by UNEP Financial Initiative and the UN Global Compact in collaboration with financial institutions as an international network of investors working together to put its six Principles for Responsible Investment into practice. As of March 2020, the PRI has 3,038 signatories with total assets under management of around KRW 126,417 trillion. 7) International Corporate Governance Network (ICGN) is the world’s largest investor-led organization to promote effective standards of corporate governance and provides a range of research and networks. The ICGN has more than 800 members from 43 countries as of July 2020. 8) Asian Corporate Governance Association (ACGA) is an independent membership organization dedicated to working with investors, companies and regulation in the implementation of effective corporate governance practice throughout Asia and producing independent analyses of laws and regulations in relation to corporate governance. The ACGA has 110 members from 17 markets as of the end of 2020. 9) Asia Investor Group on Climate Change (AIGCC) is launched to encourage action among Asia’s asset owners and financial institutions about the risk and opportunities associated with climate change and low carbon investing and provide capacity for investors to share best practice and to collaborate on investment activity, credit analysis, risk management, engagement and policy. As of the end of 2020, the AIGCC has 54 members, including pension funds, asset managers, and relevant organizations. 102 21","2020 NATIONAL PENSION FUND 4. Way Forwards 4-1. ESG Investing NPS established the Plan to Facilitate Responsible Investment in November 2019 as part of efforts to enhance market trust and confidence as public pension fund and achieve long-term returns by minimizing risks. In line with this plan, NPS has developed a road map to expand RI coverage in portfolio, formulate relevant strategies, introduce restriction screening strategies, and create a base to boost RI. Based on this roadmap, NPS seeks to develop more specific implementation measures and carry out activities. (a) Expand RI Coverage in Portfolio and Develop Strategies NPS plans to reinforce ESG Integration strategies for internally managed domestic equities. For securities in Grade D of ESG ranking, NPS will uphold the principle of refraining from investing beyond their benchmark. Furthermore, based on a commissioned study conducted in 2020, NPS will develop an ESG evaluation system and measures to apply ESG integration strategies for domestic fixed income investments. In 2021, NPS will commission a study of application of ESG integration strategies to global equities and fixed income investments considering their characteristics, investing methodologies, and associated laws and regulations to seek recommendations on specific implementation measures and apply the ESG integration strategies to global equities and fixed income investments. (b) Enhance the Implementation of RI in External Managers NPS will continue to enhance the implementation of RI of external managers. Firstly, NPS will expand the requirement of submission of RI reports throughout the entire portfolio, including domestic and global equities and fixed income investments. Secondly, NPS will grant additional scores to managers with RI policies and guidelines in place when selecting external managers for domestic and global equities and fixed income investments. To this end, scoring systems will be developed given the attributes of assets and the conditions of small- and mid-sized external managers, and accordingly associated regulations will be amended to come into force in 2022. Lastly, in order to check if external managers implement RI with faithfulness, NPS will monitor them periodically to reflect the result into the management of external managers. As-Is To-Be (proposed) • Require external managers • Require external managers entrusted Report with domestic equity investments entrusted with equities and fixed income investments at home and to submit RI reports aboard to submit RI reports • Consider RI factors in selecting • Grant additional scores to Selection of External external managers entrusted external managers with RI policy Managers with domestic equity investments and guidelines in place • Examine the implementation of • Examine the implementation of RI RI when monitoring external when monitoring external managers Monitoring managers entrusted with entrusted with equities and fixed income domestic equity investments investments at home and aboard 103 22","2020 Responsible Investment \& Governance Report 10) (c) Introduce Negative Screening (Declaration of Exit from Coal Finance) Recognizing the importance of the ESG investment principles and the severity of climate change caused by the spread of COVID-19, as well as the need for risk management relating to carbon emissions in line with more stringent global regulations such as carbon boarder adjustment mechanism, the Fund Management Committee has declared exit from coal finance to reduce carbon emissions . Starting with the declaration, NPS will stop investing in the construction of new coal power plants at home and 11) abroad, and plans to establish phased implementation measures as a preparation stage to apply negative screening. To this end, NPS will commission a study for such an issue to refer to a wide range of opinions from various stakeholders in the study in the second half of 2021, and regulate implementation measures. (d) Set Foundation for Promoting RI NPS continues to review its ESG Evaluation System, while developing ways to enhance the use of the results. In addition, NPS broadens its network with global pension funds and investors to enhance its capabilities and expertise in responsible investment, and expand the workforce dedicated to responsible investment in the overseas offices in stages. Furthermore, NPS will improve its systems to encourage investee companies to improve ESG disclosure practices to ultimately bolster responsible investment, and create an environment where capital market participants such as asset managers and brokerage firm include ESG information in their company analysis report. 10) Negative Screening is one of the responsible investments approach of reducing or excluding certain sectors, industries, or companies that do not comply with environmental, social, and governance (ESG) criteria. 11) The declaration was made in the 6th Fund Management Committee meeting in 2021 (May 28, 2021). 104 23","2020 NATIONAL PENSION FUND 4-2. Exercise of Shareholder Rights National Pension Fund Management Committee (FMC) has decided to develop the Guideline on the Composition and Operation of the Board of investee companies. NPS has already announced that through the Plan to Facilitate Responsible Investment, NPS will expand its current focus from governance to include environmental and social factors, and to further apply its ESG strategies to overseas assets. NPS plans to materialize the decisions made by FMC in stages, and file shareholder derivative actions according to the Guideline on Stewardship Activities for Domestic Equities which provides the legal basis for the litigation. (a) New Guideline on the Structure and Operation of the Board The FMC has decided to establish general principles for the composition and operation of the board as well as appointment of directors and auditors when NPS deems it necessary. The general principles, for instance, may include standard practices such as ‘the board shall perform decision making and management oversight in an efficient manner,’ ‘directors shall be appointed through transparent procedures which comprehensively reflect a wide range of shareholders’ views,’ and ‘the board shall establish a specific committee for particular functions and roles to ensure efficient operation.’ NPS will prepare general principles of the structure and operation of the board in accordance with applicable laws, standard norms on corporate governance, and the Guideline on Stewardship Activities. (b) Expansion of the Scope of Stewardship Activities The FMC has decided to expand engagement strategies when establishing plans to facilitate responsible investment. In this context, NPS plans to broaden applicable areas of stewardship activities for domestic equities while conducting the activities for global equities. To materialize the practices, NPS has included environmental and social factors in existing key focus areas while selecting ESG-related key focus areas and developing a guideline on shareholder activities for overseas equities. As-Is To-Be (proposed) • Key Focus Areas focusing on governance • Key Focus Areas focusing on governance ① Establishment of dividend policy ① Reasonableness of remuneration caps for directors ② Reasonableness of remuneration caps ② Reasonableness of remuneration caps for directors for directors ③ Concerns over violation of law Domestic ③ Concerns over violation of law (embezzlement, breach of duty, etc.) Equity (embezzlement, breach of duty, etc.) ④ Repetitive vote-against ④ Repetitive vote-against ⑤ Downgraded results of ESG evaluations ⑤ Downgraded results of ESG evaluations ⑥ Climate Change (proposal) ⑦ Industrial Accident (proposal) • Selection of ESG-related key focus areas Global •Not applicable Equity • Development of the Guideline on Stewardship Activities for Global Equities 105 24","2020 Responsible Investment \& Governance Report (c) Increase in an Ability to File Shareholder Derivate Litigation NPS has developed the Guideline on Stewardship Activities for Domestic Equities in January 2019 that lays out specific standards to file a shareholder derivate litigation and suit for damage with an aim of contributing to increasing shareholder value over a long-term horizon. In the first half of 2021, NPS plans to formulate specific standards and procedures for a shareholder derivate litigation by reviewing cases possible to file the litigation, including specific damages and filing period given the period of extinctive prescription of damages. In the second half, NPS will start to file a shareholder derivate litigation to curb any practices harming corporate value and continue to increase shareholder value in a long term. 25 106","2020 NATIONAL PENSION FUND 5. Statistics of Stewardship Activities 5-1. Voting of Domestic Equity NPS voted on a total of 3,397 proposals in 854 shareholder meetings for domestic equities in 2020, with 2,854 in favor (84.0%), 535 against (15.8%) and 8 abstentions/non-votes (0.2%). The reasons behind 535 votes against included appointment of directors and auditors (245, 45.8%), amendments to articles of incorporation (37, 6.9%), approval of remuneration cap (155, 29.0%), and others (98, 18.3%). (a) Voting Results Result No. Invested No. of Shareholder Year No. of Proposal Abstentions/Non- Company Meeting For (%) Against (%) votes (%) 2020 1,033 854 3,397 2,854 (84.01%) 535 (15.75%) 8 (0.24%) 2019 1,059 767 3,278 2,647 (80.75%) 625 (19.07%) 6 (0.18%) 2018 764 768 2,864 2,309 (80.62%) 539 (18.82%) 216 (0.56%) (b) Vote-Against Proposals Reasons for 2018 2019 2020 Vote-Against No. of Proposal Weight (%) No. of Proposal Weight (%) No. of Proposal Weight (%) Appointment of Directors 226 41.9 251 40.2 245 45.8 and auditors Amendment to Articles of 47 8.7 95 15.2 37 6.9 Incorporation Compensation of Directors 230 42.7 242 38.7 155 29.0 and Auditors Other 36 6.7 37 5.9 98 18.3 Total 539 100.0 625 100.0 535 100.0 (c) Reasons for Votes Against Proposal for Appointment of Directors and Auditors Reasons for Vote-Against 2018 2019 2020 Proposals for Appointment of Directors and Auditors No. of Proposal Weight (%) No. of Proposal Weight (%) No. of Proposal Weight (%) Long service (over 10 years) 35 15.5 52 20.7 33 13.5 Fully employed by the company, affiliates or a company that the invested company has important 61 27.0 58 23.1 77 31.4 relations with over the last five years Lack of attendance on the board 27 11.9 15 6.0 24 9.8 meetings (75% or less) Excessive dual office holding 47 20.8 34 13.5 43 17.5 Negligent oversite 12 5.3 16 6.4 10 4.1 Others 44 19.5 76 30.3 58 23.7 Total 226 100.0 251 100.0 245 100.0 107 26","2020 Responsible Investment \& Governance Report 5-2. Engagement NPS conducts shareholder activities on Focus Areas and Unexpected Concerns of investee companies while engaging in shareholder activities, including sending official or confidential letters or hosting confidential dialogue. In case investigation by authorities is initiated or ESG-related issues occur, NPS carries out shareholder activities, including sending a confidential letter or having dialogue. Aside from these efforts, NPS also conduct other engagement activities, including provision of explanations on ESG strategies, business performance, and shareholder meeting agendas as per request of companies. In 2020, NPS engaged in 225 activities, including sending letters and having dialogue, with 109 companies. Engagement for 2020 No. of engaged No. of letters sent No. of dialogue Sub-total companies Type Issue 2019 2020 2019 2020 2019 2020 2019 2020 Establishment of dividend 35 31 44 40 33 27 77 67 policy Remuneration cap for 6 12 6 12 9 20 15 32 directors Focus Concerns over violation of 4 25 5 37 5 19 10 56 Area law Repetitive vote-against 5 11 5 11 14 14 19 25 Downgraded results of ESG 1 2 1 2 1 3 2 5 Evaluation Unexpected Concerns 9 28 21 35 5 5 26 40 Total 60 109 82 137 67 88 149 225 108 27","MEMO 28","This e-Book, titled the Responsible Investment \& Governance Report, was originally published in 2021 as an attachment to 2020 National Pension Fund Annual Report to raise the understanding of fund management in NPS."];