Defending the defensible: is the defence sector sustainable? Excluding defence stocks The primary reason for excluding A&D companies Did you know? is that their involvement in so-called controversial – Exclusions on armaments are not a new develop- weapons makes them inconsistent with sustainable ment: In 1096, Pope Urban II banned the use of portfolios. Although there is no single definition of this crossbows against Christians, and the Second term – and views on what constitutes “controversial” Lateran Council extended this ban to archers in 1139. vary – such weapons are broadly forbidden via – Today, some weapons deemed “controversial” are national or international laws. Moreover, exclusions either fully or partially forbidden under international exist for specific groups of weapons: agreements or local laws, although the latter can – Most European countries forbid investments vary by country. In addition to local and international in companies that produce landmines, cluster laws, there can be further investment constraints munitions, and chemical or biological weapons. relating to specific investor distribution standards or local regulations. – However, some investors extend this ban to include companies involved in nuclear weapons, depleted uranium weapons, and white phosphorus – given the Our approach to exclusions challenges of controlling the impact of these The AllianzGI exclusions policy includes firm-wide exclusions weapons, especially on civilians, whatever their and additional exclusions for sustainable-labelled funds. The intended use. firm-wide exclusions centre on long-standing international – The final area of exclusions covers companies that protocols and agreements and its application covers produce military equipment and services. This term development, production, use, maintenance, offering for can be relatively broad but covers weapons, arms, sale, distribution, import/export, storage and transportation military supplies and equipment that may be used of the types of weapons listed on the left within Exhibit 1. For for military purposes. These exclusions depend on sustainable-labelled funds there is an additional exclusions investment standards of individual countries, and threshold for some weapons and a threshold for some military approaches can differ. equipment, also shown in Exhibit 1. Exhibit 1: Allianz Global Investors – exclusions overview Firm-wide exclusions Sustainable minimum exclusions This set of exclusions is applied to all This set of exclusions is applied to our SRI Best-in-Class, Climate Enaement 1 AllianzGI mutual funds ith utcome and SG-alined inestment cateories Weapons Coal Weapons Coal International Tobacco Companies involved Companies that Companies involved Companies that standards/norms Companies involved in controversial derive more than in controversial derive more than Companies having in the production of weapons (cluster  of their weapons (cluster  of their a severe violation to­acco. munition, anti- revenue from munition, anti- revenue from of international Companies involved personnel mines, thermal coal personnel mines, thermal coal standards and or in the distri­ution of biological, chemical, etraction. biological, chemical, extraction. international to­acco in ecess of depleted uranium Companies where depleted uranium, tilit companies regulations † of their revenues. weapons, nuclear more than  of white phosphorus that generate (including the ­N weapons outside weapons, nuclear ‚ their electricit more than 2 €lobal Compact 2 of NPT ). production is weapons inside Œ of their revenues and the ƒ„C… 2 † outside of NPT ).  €uidelines , and based on coal. from coal . ­N €uiding Companies that Principles for derive more than ‡usiness and  of revenues Š ‹ from weapons, ˆuman ‰ights ) . military equipment and service. Source: Allianz Global Investors, 2022. This is for illustrative purposes only. Exclusions apply to direct investments. Specific revenue thresholds apply, for further details visit https://regulatory.allianzgi.com/en/esg. Sustainable minimum exclusions: for sovereign issuers, an insufficient Freedom House Index score is considered unless otherwise stated in the individual investment restrictions. 1. Applicable as of December 2021, where AllianzGI is acting as the management company. For institutional funds and mandates, it is subject to the consent of the respective clients. 2. Non-Proliferation Treaty, for further details visit Treaty on the Non-Proliferation of Nuclear Weapons (NPT) – UNODA 3. Please note firm-wide exclusion coal criteria on power generation (exclude companies where more than 30% of their electricity production is based on coal) will be additionally applied for sustainable funds as criteria are not the same. 4. More information can be found at https://www.unglobalcompact.org. 5. More information can be found at https://www.oecd.org/ corporate/mne//. 6. More information can be found at GuidingPrinciplesBusinessHR_EN.pdf (ohchr.org) 7. For certain cases, flagged issuers shall be on a watch list. These companies will appear on this watch list when there is our belief that engagement may lead to improvements or when the company is assessed to take remedial actions. Companies on the watch list remain investible unless we believe that our engagement or the remedial actions of the company does not lead to the desired remedy of the severe controversy. 2