2020/21 | Responsible Investment Report

Responsible Investment Report 2020/21

Pension Protection Fund Responsible Investment Report 2020/21 2 About the PPF When an employer becomes insolvent and its pension scheme cannot a昀昀ord to pay its promised pensions, we compensate scheme members for the pensions they have lost. We take over responsibility for payments once we have assessed that a scheme cannot a昀昀ord to buy bene昀椀ts from an insurance company which Protecting are equal to, or more than, the PPF would pay. Currently around 288,000 people are members of the PPF. Before the PPF, these people could have faced signi昀椀cant 昀椀nancial uncertainty and hardship. We protect almost 10 million members of more than people’s futures 5,000 DB pension schemes. How we are funded We raise the money we need to pay PPF bene昀椀ts and the cost of running the PPF in four ways: Split of funding sources Assets from pension schemes transferred to us The return we make on our investments Our purpose is to protect the future The levy we charge on eligible of millions of people throughout the pension schemes Recovered assets we secure UK who belong to Defined Benefit from insolvent employers (DB) pension schemes. When these We have £38 billion in our investment portfolio (31 March 2021) which is continually growing, and is schemes fail, we’re ready to help. currently managed both internally and externally. We do this by paying our members, 11.5% by charging a levy and by investing sustainably. 23.1% 41.5% Our work has a real impact on people’s lives, so whatever we do, we strive to do it well, with integrity and with their future in mind. 23.9%

Pension Protection Fund Responsible Investment Report 2020/21 3 Contents Key achievements 4 Messages from our Chair, CEO and CIO 5 Chief Investment Officer’s foreword 6 Progress at a glance 2020/21 7 Purpose and governance 8 What we stand for 8 Governance overview and update 9 How we manage conflicts of interest 10 Oversight and reporting 11 ESG integration 12 Our approach to ESG integration 12 Monitoring our agents 14 Driving transparency across our portfolio 15 Engagement 16 Our engagement approach for the assets we manage 16 Our engagement approach for externally managed assets 18 Collaborating to address and mitigate market- wide risks 21 Our engagement progress and outcomes 23 Voting 25 How we escalate important issues 25 Our guidelines for voting 25 How we voted 26 Looking forward 28 Appendix 29

Pension Protection Fund Responsible Investment Report 2020/21 4 Key achievements We were delighted to be awarded A+ scores in eight modules and A scores in the remaining two modules, for the 2020 Principles for Responsible Investment (PRI) Reporting Assessment. Purpose and governance ESG integration Engagement Voting Created a new stewardship policy under the 99 per cent of external assets now Achieved tangible engagement milestones, Committed to voting every share, where oversight of the Investment Committee and managed by fund managers that have a prioritised by our most exposed holdings or feasible, and worked in close collaboration Board 昀椀rm-wide ESG policy our key themes of climate change, human with our stewardship provider to improve Updated our SIP, adding ESG risks to the 92 per cent of our external assets now rights and diversity and inclusion processes risk register and further detail on our managed by PRI signatories, following Collaborated with key stakeholders in the Upheld a voting watchlist of key companies stewardship principles and monitoring extensive encouragement with our market, such as the Institutional Investors for which we pay additional attention to external managers managers Group on Climate Change (IIGCC), Climate voting recommendations Retendered for stewardship services, Achieved 100 per cent of our Liquids Action 100+ and the PRI Expanded reporting from all managers expanding the scope into more asset managers reporting against our mandated Notable progress made by our managers with voting rights on their voting activities, classes ESG and carbon reporting templates in emerging markets, sovereign debt and beyond just our equities managers Enhanced our regular reports to our Integrated diversity metrics in our annual infrastructure asset classes Established split-voting mechanisms for governing committees on ESG activities manager monitoring questionnaires Contributed to dialogue with the UK Debt two pooled fund mandates, allowing us to Mandated compulsory inclusion of our Finalised a new climate-aware equity Management O昀케ce (DMO), led by the override inconsistent voting instructions ESG integration, stewardship and reporting benchmark to meet our investment strategy Impact Investing Institute (III) on the UK Voted on 34 shareholder resolutions related clauses within our legal agreements with while reducing our exposure to climate risks Green+ Gilt proposal to climate issues during the year 1 Collaborated with PRI signatories on managers by at least 50 per cent encouraging FTSE companies to comply with disclosure on the UK Modern Slavery Act Delivering clearer governance and Delivering lowered ESG risk across the Pushing for clear progress from our Making sure our voice is heard on behalf oversight on behalf of our members portfolio on behalf of our members issuers on behalf of our members of our members For Purpose and governance For ESG integration For Engagement For Voting section see page 8. section see page 12. section see page 16. section see page 25. 1 When compared to FTSE All-World Index carbon emissions and reserves intensity metric

Pension Protection Fund Responsible Investment Report 2020/21 5 Messages from our Chair, CEO and CIO The last year proves that environmental, social and The role of institutional asset governance (ESG) related risks, which can manifest well owners like the PPF is crucial as into the future, can also be material to investments the world adapts to the climate today. Sound social practices for companies and crisis and a post-pandemic workforce welfare proved to be an essential pillar for world. We are committed to any company in the times of the COVID-19 crisis. rising to this challenge and pleased to share the positive action we’ve taken this year. Transitioning away from fossil fuels One example of this is the introduction We’re actively setting new is also a critical step for the future of new ESG and climate reporting standards in our work with of the world. The realities of physical that we require from our managers. climate risks are becoming ever more our external managers and apparent as we see the impacts of Gathering evidence of the stewardship engaging with important climate change on a global scale – such activities that our managers have as the devastation caused by recent undertaken on our behalf has been initiatives around climate challenging. I’m particularly pleased wild昀椀res, 昀氀oods and hurricanes. The rise with how we developed our new ESG change, diversity and fair in the importance of limiting warming to 1.5ºC – and the role investors should reporting templates to address this. working conditions. play in this transition – are clear. We recognise that stewardship is an Since becoming a PRI signatory in important lever to bring long-lasting By acting as active, responsible Kate Jones, Chair of the Board 2007, we have come a long way, yet change. This year we published our stewards, we can ful昀椀l our now more than ever, it is vital to keep stewardship policy, which sets out our a prudent steer on our investments priorities and expectations in the area. mission of protecting people’s for our members and stakeholders. We also welcome the development of futures while having a real more standardised voting reporting and Responsible investment (RI) is a speci昀椀c We’ve come a long way since area of focus highlighted in our 2019–22 guidelines (including around con昀氀icts impact on the world around us. becoming a PRI signatory in Strategic Plan. As we move into the of interest) from the Pensions and Lifetime Savings Association (PLSA). 昀椀nal period of this plan, we look to Oliver Morley 2007, but the challenges of accelerate our work in this area. Diversity and inclusion is another major Chief Executive O昀케cer climate risks are more real We are committed to setting an example area of importance to our organisation than ever. It’s vital to keep a of best practice implementation. that is also increasingly gaining focus In the past year, we welcomed and in the investment industry as a whole. prudent steer on our contributed to the Department for We work actively within our own investments for the bene昀椀t of Work and Pensions (DWP) consultations business to set new standards, and on reporting on climate risks and monitor our managers to ensure that members and stakeholders, considering social factors. We are the organisations managing our assets and to use our in昀氀uence for actively considering how the investment and the companies we invest in re昀氀ect the greater good. industry can best support UK legislation the societies in which they operate. requiring the Government to achieve The Board, and our Investment net zero emissions by 2050. Committee, actively oversee how we Kate Jones are managing RI considerations. Over Chair of the Board We strive to use our in昀氀uence with the the year, we continued to be engaged asset management community and with the ESG developments and work tirelessly with our fund managers informed of our progress on activities to ensure we are well positioned for taking place throughout the investment the transition. portfolio. This is our second RI report and we are delighted to share our most recent activities and achievements Oliver Morley, in stewardship practices and other Chief Executive O昀케cer RI developments during the year.

Pension Protection Fund Responsible Investment Report 2020/21 6 Chief Investment O昀케cer’s foreword Our investment strategy is focused on delivering sustainable long-term returns, and RI is a core component of this. Through the three key priorities of our RI strategy – climate change, stewardship and reporting – we seek to reflect the importance of these issues in the broader context of the investment world. This year we are publishing our 昀椀rst Transparency is key to enabling us detailed Task Force on Climate-related to perform our oversight duties, Financial Disclosures (TCFD) report so we now require our external alongside this RI report. We’ll also managers to complete comprehensive continue to include a summary of our reporting templates to improve our climate disclosures in our Annual Report understanding of ESG and climate and Accounts. risks in our portfolios. This has not been a simple task. It required During the year, we chose to amend many months of engaging with and our Statement of Investment educating our managers to design Principles (SIP) to address the evolving relevant templates for their strategy. Barry Kenneth, Chief Investment O昀케cer expectations of asset owners around RI and stewardship. Our newly In the past year, we’ve also worked hard approved stewardship policy builds with our service providers to update our on these principles and further details portfolio management systems with the our commitment to engaging with ever-expanding ESG and carbon data We want to keep raising our external managers and working and analytics available. These combined collaboratively with industry partners. e昀昀orts have improved our ability to the bar, not only for monitor, report on and ultimately ourselves but also for We also progressed the implementation manage these risks and opportunities. of our climate strategy, by developing those we choose to a new climate-aware version of our We’ll continue to mandate more equity benchmark. We 昀椀nalised this work with. fund-speci昀椀c ESG reporting from our with our index provider, FTSE Russell, managers. It is still challenging to gather in March 2021. Our expectation is this information, especially in less that it will considerably reduce the traditional strategies, but we actively Barry Kenneth climate risk pro昀椀le of our equity support our managers’ development. portfolio, while still delivering the Chief Investment O昀케cer We hope this will also bene昀椀t other fundamental characteristics we seek. asset owner clients. We have seen great progress from our Liquids managers in We greatly value the power of collective the past year and are now rolling out engagement to address systemic risks. the templates to cover our Alternatives One example is our continued portfolios in the coming year, starting membership and involvement in the with Real Estate. The quickly evolving work of the IIGCC. This includes regulatory landscape in relation to ESG supporting the ongoing Climate Action matters continues to drive reporting 100+ initiative as well as participating in practices forward and we remain working groups developing the Paris committed to evolving our strategy and Aligned Investment Initiative (PAII) and risk processes to stay ahead of the investor expectations on physical risks. market dynamics. Barry Kenneth Chief Investment O昀케cer

7 Pension Protection Fund Responsible Investment Report 2020/21 Progress at a glance 2020/21 Stewardship Climate change Reporting Next steps Published stewardship policy to Developed our assessments and Number of managers as PRI Results and action points from align with global standards scenario analysis of climate-related signatories grown significantly by climate alignment assessment risks and opportunities 25 per cent ! Updated Statement of Introduced new climate-aware Awarded PRI assessment scores Further development of stewardship Investment Principles (SIP) to equity benchmark of A+ in 8 modules and A in practices and voting guidelines further cover ESG issues remaining 2 modules Expanded stewardship services to Full portfolio climate alignment Setting best practice reporting Focus on net zero scenarios and cover our in-house managed assets analysis under way standards on ESG and climate risks engagement with issuers and and oversight of pooled fund assets from our managers external managers

Pension Protection Fund Responsible Investment Report 2020/21 8 Purpose and governance Our approach to RI and stewardship Our RI framework puts our core beliefs into practice: RI Framework governance & Strategic Risk Metrics & accountability direction & management transparency policy Priorities Reporting Climate Change Stewardship What we stand for Our values Integrity: We consider all material ESG risks when we assess investment opportunities Engaging with fund Doing the right thing managers Our purpose is to make sure we can continue to pay current and future Our purpose is to ensure Engaging with members their full bene昀椀ts for life. We believe this goes hand-in-hand Collaboration: We work collaboratively with peer issuers we continue to pay with responsible investing for two Working as one organisations and partners members their full main reasons: bene昀椀ts and this goes Voting of shares • Good corporate governance and hand-in-hand with management of ESG risks is an Accountability: We enact our shareholder rights and collaborative responsible investing. indicator of how well an organisation push our fund managers to deliver best manages risk as a whole Owning our engagement & practice on ESG risk management and • Exercising our ownership rights is not actions and their public policy only a key part of being a responsible transparency owner but also helps safeguard outcomes sustainable returns in the long term We encourage our fund managers and Respect: other stakeholders to deepen Diversity Read our RI strategy to learn more Valuing every voice and Inclusion practices about our beliefs, aims and objectives. Our values Excellence: We’re never complacent – we strive to Our ICARE values de昀椀ne how Being our best grow our RI practices and set new we conduct business across the standards organisation. They are integrated into every employee’s performance development review and objectives. Whenever we make investment decisions, we also apply these values. The table alongside shows how we translate these 昀椀ve values into performing our duty as a responsible investor.

Pension Protection Fund Responsible Investment Report 2020/21 9 Purpose and governance continued Governance overview Highest governing body with oversight of RI and stewardship Updating key policies PPF Board and update activities (including climate-related). Taking action RI governance and stewardship The Board has committed that the Investment of our investments: Investment Responsibility for developing and maintaining the Fund’s RI and Committee will review our SIP and RI policies annually, committee stewardship principles and policies (including climate-related). to ensure they stay relevant and ambitious. During the year, the Investment Committee reviewed our SIP, our climate change policy and our exclusion policy. The Committee also approved our new stewardship policy. Investment Team Led by the CIO. Responsibility for ensuring adherence to the RI All policies are available on our website. framework, stewardship principles and associated policies across all asset classes, both internally and externally managed. New SIP New stewardship policy ESg Team The ESG Team, as part of the Investment Team, provides support and expertise, oversees appropriate implementation of the RI framework, As part of this year’s annual We developed a new stewardship engages with portfolio managers and monitors investments for ESG review and our drive to deliver policy during the year and it was risks and opportunities. Engages with external asset managers and best practice, we chose to update approved by the Investment stewardship service providers. our SIP in line with the DWP’s Committee and Board in amended occupational pension March 2021. Follows the PPF’s RI framework and stewardship policy, undertakes schemes regulations. Asset managers and This policy outlines our approach ESG integration and engagement, then reports transparently stewardship service and accordingly. Within the new SIP we provided to stewardship – including how provider (EOS at further detail on our principles we engage with our managers around stewardship and monitoring and underlying issuers on RI issues – Federated Hermes) external managers. We also as part of managing the Fund, in line included ESG and climate-related with the SIP. risks as a speci昀椀c part of our risk register, which is regularly It has been developed to allow us monitored by the Investment to address the requirements of the Committee. Financial Reporting Council (FRC) Our Investment UK Stewardship Code 2020 and the European Union Shareholder Committee Rights Directive II (SRD II). reviewed our SIP, climate change Review of climate Review of exclusion policy and change policy policy exclusion policy during the year. In 2019, we 昀椀nalised a speci昀椀c Our exclusion policy applies to all climate change policy for our funds and relevant asset classes. investments, which outlines It covers controversial weapons, our approach to climate-related recreational cannabis and sovereign risks and opportunities. The issuers with a UN imposed arms Investment Committee reviewed embargo. this policy in 2020/21 as part of its annual review cycle. The list is updated on a quarterly basis, as determined by an independent external data provider.

Pension Protection Fund Responsible Investment Report 2020/21 10 Purpose and governance continued How we manage Our Con昀氀icts of Interest con昀氀icts of interest and Code of Conduct policies are reviewed We have taken all reasonable steps to annually. prevent potential or actual con昀氀icts of interest that could impact our members or stakeholders. In this section of the report, we’ve detailed the wide range of controls we’ve implemented to put the • Senior manager 昀椀tness and Stewardship Code 2020, putting the best interests of members and our proprietary checks best interests of clients and business 昀椀rst. We have implemented a version bene昀椀ciaries 昀椀rst. PPF Con昀氀icts of Interest and Code of the FCA’s Senior Managers and of Conduct policies Certi昀椀cation Regime. As part of this regime, the C&E team meet annually with senior managers to discuss Our formal Con昀氀icts of Interest and Code of Conduct policies set out their roles and responsibilities. This Taking action: principles and procedures for includes assessing any potential We have experienced a varying identifying, assessing and managing con昀氀icts and forms part of the annual level of disclosure from our fund assessment of their 昀椀tness and con昀氀icts. These policies are reviewed at managers on how they are least annually by the Compliance and proprietary to carry on their role. assessing and managing Ethics (C&E) team and approved by the stewardship-related con昀氀icts of Executive Committee (ExCo). Other checks, as part of this 昀椀tness interest. In an e昀昀ort to ensure and propriety assessment, include continuous improvement, we are • Register of con昀氀icts and outside performance review along with credit and background checks on a rolling looking to address this in the business interests coming year by asking our The C&E team maintains a register three-year basis with self-assessments carried out every year. managers to report more of employees’ con昀氀icts and outside business interests, which they review speci昀椀cally on their stewardship- at least once a year. We also share The C&E team maintains a register of • Rigorous procurement processes related con昀氀icts. Board members’ outside interests on all gifts and hospitality that have been When procuring new suppliers, we our website. accepted and declined, with regular are subject to the Public Contracts Outsourced stewardship provider reviews to make sure these are within Regulations 2015. Our dedicated • Ongoing training acceptable levels. Commercial Services team makes Our external stewardship provider, EOS, All employees receive training on sure new contracts follow the correct procurement process and are considers con昀氀icts when undertaking con昀氀icts of interest when they start We also publish Board member voting and engagement on our behalf, and as part of ongoing development. expenses quarterly on our site. awarded fairly, based on objective as part of its Stewardship con昀氀icts of They also sign to say they’ve read, criteria. interest policy. Under this policy, sta昀昀 understood and followed these • Personal accounts The Commercial Services team also report any potential con昀氀icts to the policies every year. Our Personal Account Dealing compliance team to be assessed and, policy requires all transactions to maintains an ongoing assurance when necessary, the register is updated. • Gifts and Hospitality policy programme for all our suppliers. be approved by line managers and The con昀氀icts of interest register is Our Gifts and Hospitality policy reviewed by senior management on a requires all employees to request the C&E team. If there’s a con昀氀ict Outsourced external management regular basis. between the employee, member or sign-o昀昀 from their line manager and PPF interests, we may create a list Our fund managers are assessed by a the C&E team before accepting gifts or of restricted investments that our dedicated Operational Due Diligence EOS has the right expertise, policies, hospitality over the value of £25. employees can’t invest in. (ODD) team who complete checks, research and resources to carry out day-to-day stewardship activities on our which include reviewing Con昀氀icts of Interest policies and monitoring them behalf. Therefore, if con昀氀icts of interest on an ongoing basis. We clearly were to arise (for example, with the reference our expectations in this area sponsoring entity of a scheme we are across all agreements and side letters. protecting) we would adopt an arm’s length approach and avoid overriding its Where there’s potential for any con昀氀icts decisions. However, we review voting of interest, we expect our external proposals ahead of AGMs and reserve agents to identify and manage these the right to amend any votes. under Principle 3 of the FRC’s UK

Pension Protection Fund Responsible Investment Report 2020/21 11 Purpose and governance continued Oversight and reporting EOS provides voting recommendations We hosted our 昀椀rst to us for our segregated equities, in line Member Forum in with its published corporate governance principles. However, we are always 2020, presenting a New internal RI reports in control of the vote and have the unique opportunity to We provide monthly updates on the ability to exercise our voting rights in management of our climate-related segregated holdings in line with our own 昀椀nd out exactly what and other ESG risks to the CIO and policy and principles. our members think. the Head of Investment Strategy. EOS carries out engagements and We also highlight portfolio-relevant exercises votes in line with the information or events as they arise Hermes Responsible Ownership in our daily investment meetings. Principles. These have been devised to contribute to better management of companies and the sustainability of investments over the long term. EOS is also a signatory to the Best Taking action: Practice Principles for Providers of This year the ESG team developed Shareholder Voting Research. a new quarterly RI update report for the Investment Committee. The report reviews our RI policies, processes and policy review schedule. It provides updates Taking action: on stewardship, manager We monitor EOS’ activities appointments and monitoring, through regular contact, and ESG oversight of managers Keeping our members updated and key quantitative metrics such more formal quarterly client as ESG scores and carbon meetings. We participate in We continuously review all existing More broadly, we actively seek our intensity by asset class. its semi-annual client advisory and potential managers’ policies, as members’ and stakeholders’ views and council meetings and have fed well as their ESG integration processes feedback by a number of methods, Oversight of stewardship services back to the 昀椀rm extensively on the and reporting to ensure they meet including quantitative surveys, development of its new client our evolving minimum standards. We consultations, focus groups, one- We have chosen to outsource portal over the last year. Our also keep a close eye on the portfolios to-one interviews and our Member stewardship activities for our active participation in these meetings of our managers through our own Forum. We know that stakeholders segregated listed equities, to ensure that enables us to in昀氀uence EOS’ systems, and consider whether they expect us to invest responsibly and are in line with our expectations we believe we have a duty to set the our shares are voted cost-e昀케ciently and approach, the issues of focus and our portfolio companies are engaged the targets of our engagement, so of the mandate agreement. This highest standards of practices. with, where ESG concerns arise. that the service remains bene昀椀cial analysis helps inform our ESG review, as discussed on page 14. for our members. Our ODD function assists with monitoring our managers’ ESG risks Taking action: We’re committed to regular Taking action: and stewardship policies. They also reporting and transparency so that We regularly review our review policies in key areas such as our members and stakeholders can outsourced stewardship services ethics, business continuity, disaster be aware of our progress and and retendered for this in October recovery and money laundering. activities in all areas, including 2020, taking the opportunity to stewardship. We regularly update expand our requirements around We will not appoint or allocate more voting and engagement. We capital to managers that fall short of our website with timely published wanted to improve and expand our standards. voting and engagement statistics coverage to our in-house managed and responses to consultations. assets in 昀椀xed income and cash, For example, when we identi昀椀ed that an We’re publishing our second as well as drive greater insight on infrastructure investment manager annual RI report, we provide RI the engagement services for our didn’t have a Gifts and Hospitality policy, disclosure in our Annual Report pooled assets. Following a due we made this a requirement of its and Accounts and we’ve published appointment. a dedicated TCFD report. Our diligence process, we reappointed Head of ESG frequently speaks at EOS at Federated Hermes. industry conferences and events.

Pension Protection Fund Responsible Investment Report 2020/21 12 ESG integration Our approach to We amend our approach depending Setting new standards for upon the asset class or strategy, how stewardship ESG integration directly we’re invested in it and the ESG best practice is still developing, level of control we’ve been granted. so we work extensively with our external managers and incentivise We insist on a high level of responsible In line with our RI strategy, and detailed conduct from our underlying issuers, them to develop their processes in our 昀椀rst RI report, we embed and seek to avoid investing in issuers in line with our RI principles, for material ESG considerations right that contravene international example by setting time-bound across our investments and our work conventions or norms for controversial commitments in legal documents. with external managers, from selection activities that are rati昀椀ed into UK law, Owing to our size, we have the through to ongoing monitoring and for example the production of speci昀椀c reporting. controversial weapons. opportunity to encourage improvements in ESG integration around the globe. We also engage with our underlying We implement this through a small We see this as an area where we issuers and use our voting powers to exclusion list, which is applied across can in昀氀uence and help set new advocate for ESG principles. our Fund to the extent possible. standards for the industry, particularly The Fund’s targeted strategic asset in private markets which have less As outlined in our full stewardship allocation is as follows: developed stewardship practices. policy, we strive to extend our Listed equities historically have most activities across our entire portfolio. established stewardship practices, but – as shown in our strategic asset allocation chart – they make up a PPF strategic asset allocation (31 March 2021) smaller part of our investments. In asset classes where good stewardship isn’t fully established yet, we consider the 6% best and most e昀케cient approaches. Our regular review meetings with our fund managers often include education around these methods and emerging developments. 40% 42% Diversity and inclusion is a topic 13% that we’re focusing more on at the organisational level of our Liability hedging instruments Return-seeking assets fund managers. Over the last Hybrid assets Cash two years, we have been including questions relating to this in our tender documents, which form part of the overall ESG assessment.

Pension Protection Fund Responsible Investment Report 2020/21 13 ESG integration continued Summary of our ESG integration approach The following table summarises our approach to ESG integration and stewardship across each asset class. Asset class Integration and stewardship approach Direct Liability Driven Investment • We engage with borrowers, primarily during reissuance or re昀椀nancing. Less in昀氀uence in sovereign debt, (LDI) although we engage on issues like LIBOR, Retail Price Index (RPI) and inaugural UK green gilts issuance (Managed in-house) UK Public Credit and Strategic • We engage with borrowers, more so around reissuance or re昀椀nancing cash • External stewardship provider also covers these portfolios for engagement services UK Private credit • We engage with borrowers, more so around reissuance or re昀椀nancing Indirect Listed Equities • Managers can exert in昀氀uence on companies through voting and engaging with company management. (Externally Approaches will di昀昀er depending on whether managers follow active, systematic or passive strategies • We re昀氀ect any concerns from our assessments in our voting and engagement approach. We also use intelligence managed) from engagements to inform our assessment • External manager monitoring Listed Credit: corporate, • Managers can engage with borrowers, more so around reissuance or re昀椀nancing – sovereign, emerging markets less in昀氀uence in sovereign debt (EM) Absolute Return • External manager monitoring • Managers can engage, but with limited in昀氀uence in strategies with shorter holding periods Real Estate • Managers with full control of assets can engage with tenants and local community • Continuous engagement on climate resilience Private Equity and • Managers can have direct engagement with companies or assets in primary funds, or with operating companies Infrastructure in infrastructure, especially if they have Board seats Private Credit • Managers can have ongoing dialogue with borrowers, but limited control over management Secondaries and Fund of • External manager/General Partner monitoring Funds

Pension Protection Fund Responsible Investment Report 2020/21 14 ESG integration continued The ESG review The ESG review is an essential part of selecting and appointing managers that align with our principles. RI criteria and ESG considerations as part of our investment process Phase Request for Selection/ Appointment Post funding proposal/ due diligence identi昀椀cation ESG Evidence of 昀椀rm-level Ensure ESG Binding ESG and Ongoing monitoring requirement and strategy-level processes are in climate risk clauses and engagement with ESG policy; PRI place, appropriate inclusion in legal external managers; support; and industry guidelines documentation (e.g. regular fund-level capabilities or are followed and IMAs, side letters) ESG, carbon and resources for ESG reporting is available stewardship reporting; integration commitment to continuous improvement Taking action: In the past year we have withheld investment – A key consideration within a recent passive from both new and existing managers – when equity RFP was that the fund managers Monitoring our agents Our RI requirements Amending our historical we haven’t seen su昀케cient progress on ESG had appropriate stewardship processes We’ve implemented minimum RI agreements integration or they’ve been unwilling to meet and capabilities in place and could provide requirements that all our external We’ve spent considerable time over the our minimum requirements. the reporting to us that we need. Although underlying stewardship managers must meet, to ensure we last two years working with our legal are all aligned. These are speci昀椀c to team to amend historical paperwork with our issuers is largely carried out each asset class but all managers across all our external mandates, where by our external fund managers and stewardship provider, we carry out a must agree to: possible. This has largely been driven by holistic oversight of our external agents our wish to have better reporting from Case study across the Investment team, ESG team • Follow an external standard, our managers. Raising the bar and ODD team. preferably the PRI • Regularly report on ESG and It has been particularly challenging in We continually monitor our agents’ climate-related matters the alternative asset classes where practices in order to enhance the • Apply our exclusion policy most vehicles are closed funds and We’ve worked hard to engage with our • Share evidence of integrating material our position of leverage is lower. managers and keep their processes up to quality and quantity of their stewardship ESG factors within their investment However, whenever new fundings market standards. In 2020/21, 11 of our 92% activities and ensure consistency with analysis, decision-making and are coming up with an existing managers became signatories to the PRI, our own investment beliefs, policies stewardship practices on an ongoing manager, we’ve encouraged them to of our external assets 昀椀ve of which are large US-based private and guidelines. basis amend the old fund documents as markets managers. are managed by PRI Generally speaking, we expect our well if they wish to be considered. signatories fund managers to focus on the next By setting down these expectations in As a result, 92 per cent of our external assets link in the investment chain and legal documents, they form part of the are managed by PRI signatories (up from 80 have greater expectations for our overall investment management per cent), while 99 per cent of our external agreement (IMA). 99% fund managers managing strategies Taking action: assets are with managers that have a 昀椀rm- with longer holding periods. We report our progress on this to wide ESG policy. It’s especially good to see of our external assets are our Investment Committee progress in private markets as this is an area with managers that have a quarterly and have been able to where we have spent a lot of time engaging 昀椀rm-wide ESG policy with our managers over the last year. demonstrate an ongoing reduction in the percentage of assets in this category that do not have updated terms re昀氀ecting our expectations.

15 Pension Protection Fund Responsible Investment Report 2020/21 ESG integration continued Monitoring our managers Driving transparency We continuously monitor our managers’ across our portfolio We’re pleased to report that 100 per progress through regular reports on cent of our managers of publicly stewardship activities, ESG-related risks traded assets are reporting under this and climate-related information. When We expect our external managers to we raise issues with speci昀椀c managers, new framework now, so we have we report this to the Investment in昀氀uence issuers, regardless of asset oversight over: Committee. class, and update us on their actions. This includes engagement and taking Our fund managers are also assessed part in collaborative initiatives, and by the ODD team, who we work with to being transparent about voting where ensure that ESG considerations are part we have ballots. ESG policy compliance during the quarter, of the appointment and reviews of fund We regularly carry out in-depth reviews including identifying and managing material managers. We screen for reputational of their activities to assess how they’re ESG risks risks and are now implementing engaging on our behalf and particularly diversity and inclusion metrics in the scrutinise votes on our key themes of Stewardship activities during the quarter, annual ODD questionnaire. This will climate change, diversity and inclusion, including engagement and voting allow us to capture the information we Board governance and executive need to help drive diversity in the remuneration. investment industry. ESG portfolio pro昀椀le However, more can be done, so we’re continuing to drive transparency across TCFD climate assessment of the portfolio our portfolio. Taking action: This year we worked extensively with our Liquids managers to develop dedicated reporting Implementing diversity templates that will give us insight and inclusion metrics into essential ESG, climate and in the annual ODD stewardship data across our Liquids portfolios. This will allow questionnaire will our dialogue with the managers to Improving portfolio Our Liquids managers allow us to capture the be more targeted, and enable us management systems are now preparing to to report our own stewardship Over the past year, we’ve also worked closely information we need to progress. with our service providers to get easier access to share additional help drive diversity in ESG and stewardship data across our systems. metrics in early 2022, the investment industry. Our Liquids managers are now particularly in the area preparing to share additional metrics in early 2022, particularly in the area of of more advanced more advanced TCFD climate analysis. Taking action: TCFD climate analysis. We’re also rolling out the reporting We’ve created speci昀椀c templates in our process to our Alternatives fund portfolio management system so that we managers and we aspire to have appropriate templates in place across can quickly run self-serve reports and the book by 2022. regularly assess a portfolio for ESG risks ahead of a manager review meeting. We believe that this engagement with As it’s still di昀케cult to get exactly what we our fund managers has increased need, especially in private markets, we’re their awareness of potential ESG continuing discussions with software risks, particularly climate-related. providers to 昀椀nd ways to enhance We also believe that it has already their platforms so we can monitor led to a signi昀椀cant impact on the developments across more of our Fund. risk pro昀椀le of our managers.

Pension Protection Fund Responsible Investment Report 2020/21 16 Engagement How the Fund is managed We prioritise We manage around half of our assets in-house, engagements in through a team of portfolio managers across LDI themes of greatest hedging strategies, hybrid assets and strategic cash. importance to us, The remaining 50 per cent is managed by external in sync with our fund managers across a range of vehicles, including own RI strategy. segregated accounts, pooled funds, closed-end funds, co-investments and passive instruments. Our approach to Our engagement approach engagement for the assets we manage Engagement is a driving force behind Engagement in LDI assets our RI strategy and we’ll always exhaust Our objective is to improve the it before considering divestment. However, there’s a real need to boost e昀케ciency and functioning of markets through collaboration on important Case study transparency around engagement, issues with stakeholders and especially in asset classes such as policymakers. As a large participant in Green gilts sovereign debt and private assets, the Gilt market, we regularly engage which could have the greatest potential with the DMO and HM Treasury. for impact. Over the past year, we’ve This involves taking part in annual In October 2020, we supported the express our opinion. We therefore worked hard to improve this and consultations, forums and investor Green+ Gilt Proposal developed by took part in a closed-door working support our managers to engage with roundtables. the III, Green Finance Institute and group organised by the III to the entities in their portfolios. Grantham Research Institute. develop potential metrics and We prioritise engagements in themes measurement frameworks for of greatest importance to us, in sync Green gilts are a sovereign bond environmental and social co- with our own RI strategy. As part of this with an aim to attract private bene昀椀ts reporting. we work closely with our stewardship Taking action: sector capital into the green This year we provided support recovery and social renewal. As part of this, we highlighted provider to de昀椀ne focus areas and and insight on developing the Following the Chancellor’s the importance of ensuring provide feedback on them. More UK’s green gilt issuance. announcement, in the Spring 2021 diversity is considered in the detail on our engagement approach Budget, of at least £15 billion in just transition to a low carbon was provided in last year’s RI report. green gilts issuance, the III was world, as some technology and As a participant in derivatives markets, appointed as Secretariat of the infrastructure industries are still we already have an established new Stakeholder Discussion Forum very heavily male-dominated. We oversight process for our bank on green 昀椀nance, set up by HM welcome the development of the counterparties. However, over the Treasury and the DMO. UK Government Green Financing coming year we’ll be exploring how to Framework, although we believe further embed ESG considerations and While our participation in any such the right requirements must be engagement practices of counterparties issuance will be based on it meeting put in place to report on the use of to strengthen our ongoing assessments our investment requirements, as proceeds and impact. of and reduce counterparty risks related active stewards it’s important to to ESG issues.

17 Pension Protection Fund Responsible Investment Report 2020/21 Engagement continued Engagement in hybrid and Our public hybrid assets and strategic 12 out of 19 strategic cash assets cash books have reasonable ESG and companies with We take a nuanced approach within our carbon data coverage within our Taking action: hybrid assets, depending on whether portfolio management systems. Over the year, we also brought speci昀椀c objectives they are private or public. We can use these to monitor the our UK Public credit and cash in our internally portfolio regularly, along with assets under the remit of the Our private assets are typically held assessments from open-source engagement services from our managed 昀椀xed for the long term and often have very initiatives. For example, being an external stewardship provider, EOS, income holdings saw little secondary market liquidity. This investor member of Climate Action 100+ as part of the expanded contract. makes due diligence – including ESG has helped us understand the transition identi昀椀able progress assessments and issuer engagement – plans of European energy corporates during the year. critical at the pre-investment stage. when reviewing their debt instruments Enel SpA for inclusion into our portfolio. An example was Enel, a Climate EOS identi昀椀ed 74 engagement Action 100+ company, where EOS objectives or issues to engage on across Taking action: 35 companies in the portfolios last year. set a speci昀椀c objective to encourage Over the last year, we have the company to acknowledge declined a number of deals due to the need for phasing out coal 12 out of 19 companies with speci昀椀c power generation. This objective extreme governance concerns objectives saw progress on those progressed to the next milestone in with an issuer or uncertainty objectives during the year. December 2020 when the company about future earnings from particular industries over the con昀椀rmed it had developed a phase-out plan, and was con昀椀rmed long term. as completed in January 2021, when the company updated its coal phase-out timeline, committing to a coal-昀椀red power asset closure schedule by 2027 instead of 2030. Case study Monmouthshire social housing deal In 2021 we directly invested has published a comprehensive in re昀椀nancing debt for the environmental policy. Monmouthshire Housing Association (MHA) loan portfolio. The Welsh Government’s The MHA was established in 2008 decarbonisation target by 2030 to provide and manage a昀昀ordable presents a challenging opportunity homes for people who need them. to the real estate sector in It also helps make sure that homes meeting these targets. Therefore, meet and are maintained to the the MHA has been developing a Welsh Housing Quality Standard. comprehensive business plan that outlines potential costs around The MHA manages and maintains energy e昀케ciency measures and around 3,600 homes and 270 capital expenditure for achieving leasehold properties, garages and carbon savings. We are monitoring land around and within its estates. closely the progress of the MHA It’s committed to managing its in setting and achieving carbon housing stock in alignment with reductions alongside providing environmental standards and a昀昀ordable social housing.

Pension Protection Fund Responsible Investment Report 2020/21 18 Engagement continued Our engagement Engagement themes approach for externally for 2021–23 managed assets Harmful substance management Value chain rights Waste and circular economy initiatives Protection of basic rights Major pollution incidents Indigenous rights and traditional communities As detailed on page 11, we extensively review all existing and potential managers’ RI policies, ESG integration processes and stewardship practices Biodiversity and so we’re con昀椀dent they’re meeting Diversity and inclusion sustainable land use our standards. Terms of employment Sustainable food systems Health, safety and wellbeing We also instruct EOS – our stewardship Water stress Pollution, waste provider – to engage and vote across Human and and circular our segregated equity mandates. EOS economy labour rights carries out engagements on our 昀椀xed- income holdings and reviews the Natural activities of our managers of pooled resource Human capital funds as well. stewardship management t n S Equities Strategy and action e o Ethical culture and anti- m c n i Governance and lobbying o a bribery and corruption r l Disclosure vi Arti昀椀cial intelligence and Engagement in climate n data governance E Conduct, Responsible tax practices segregated equities change culture and Our 昀椀rst RI report and our stewardship ethics policy provide more detail on our Stewardship approach to engaging with issuers in our segregated equities. G k n o s o i i v r t During the year, EOS reviewed its a Composition and structure e , Audit and accounting r y c engagement themes for the 2021–23 Dynamics and culture n g i Sustainability reporting a e n corporate period, as shown in this graphic. EOS Board n t u Evaluation and succession c a Integrated reporting r t currently focuses on four priority effectiveness e S m reporting planning m o c sectors: human and labour rights, & human capital management, Board e昀昀ectiveness and climate change. Risk management Taking action: Executive remuneration We also constantly communicate Structure and metrics Serious operational risks with EOS, providing feedback Transparency and disclosure Shareholder Cyber security and input to its engagement protection Business Quantum of pay outcomes Product risks purpose and roadmaps when needed. and rights strategy Engagement themes for 2021–23 will drive progress in key areas, especially climate change and labour rights. Basic protection and rights Business purpose Minority protection and rights Capital allocation Investor engagement Long-term sustainable strategy Source: 2020 PPF Annual Voting & Engagement report, EOS at Federation Hermes

Pension Protection Fund Responsible Investment Report 2020/21 19 Engagement continued EOS carries out engagement through a four-step process. As shown below, it begins with raising a concern which it Engagement in follows up diligently until it achieves a measurable outcome. The process can span a few quarters. pooled vehicles Due to current operational barriers in Engagement milestone process of our external provider extracting shareholder rights, we must generally accept that our managers 4 will carry out stewardship activities The company for pooled equity investments. In 3 implements a strategy most cases, fund managers engage or measures to and vote on our behalf concerning The company develops address the concern. investee companies in these funds. 2 a credible strategy to However, our new quarterly reports The company achieve the objective, from our managers give us oversight 1 acknowledges the or stretching targets of engagements, votes and outcomes. Our concern is raised issue as a serious are set to address the with the company at investor concern, concern. Fixed income the appropriate level. worthy of a response. Engagement carried out by debtholders has a way to go, partly due to limited in昀氀uence in some areas – however, it is developing and becoming increasingly Progress important. We believe we can reach better outcomes in these asset classes Case study through long-term relationships and by encouraging managers to keep pursuing The IPDD – engaging on deforestation their stewardship agenda. Engagement across sovereign Several of our credit managers However, investors noted that debt and emerging markets are part of the Investors Policy recent policies appear to be Sovereign debt is a fundamental Dialogue on Deforestation (IPDD) moving the country further away asset class for every asset owner initiative – a global investor-led from deforestation goals. They and a pillar of a well-functioning engagement under the Tropical urged the president to engage economy. Engagement in emerging Forest Alliance. The initiative with other stakeholders to 昀椀nd markets is crucial where dialogue aims to halt deforestation and constructive solutions to the with governments takes a concerted mitigate investment risks in threat of illegal deforestation. e昀昀ort over time. Investors’ voices are vulnerable geographies, focusing also vital for pressing topics such on Brazil and Indonesia. To In Indonesia, the work is in earlier as the transition to a low carbon combat deforestation, the IPDD stages – laying out the scene that economy and deforestation. engages with key individuals and there’s a lot of investor demand government agencies to hold them to drive progress on deforestation We welcome the evolution of tools and accountable, head o昀昀 unwelcome and responsible land management. data sets that deepen the ability of legislation and push for supply We receive regular updates from investors to measure climate-related chain transparency. managers who are members of and other ESG risks in relation to the initiative and continuously sovereign bonds. We encourage our In Brazil, the initiative has already encourage further dialogue at managers to contribute knowledge and made considerable progress local and state government level. resources to drive progress forward. through active dialogue with local and municipal governments.

20 Pension Protection Fund Responsible Investment Report 2020/21 Engagement continued Engagement in investment Our listed infrastructure grade credit manager recently It’s encouraging to see how engagement presented its analysis on practices have evolved within investment grade credit. We’re pleased climate scenarios to our that all of our managers in this asset investment team. class now report their stewardship progress to us regularly. We see engagement with debt issuers as having a longer-term focus, given their need to reissue debt on an ongoing basis, and one that is well suited to our investment pro昀椀le. Green bonds are an ever-growing share Engagement in private debt Our listed infrastructure manager of this asset class and we expect our managers to consider these as potential Case study We have been working with our has played a key role in integrating scenario analysis on climate-related investments if the 昀椀nancials or credit Promoting employee managers in this more challenging asset risks in its investment approach. risk 昀椀ts with their investment case. health and reducing class to increase their engagement However, transparency and assurance processes. We encourage them to It recently presented this to on the use of proceeds as well as plastic pollution provide us with information on progress our investment team through an continuous oversight are key to the and demonstrate the added value of informal training session. integrity and success of the green bond more stringent sustainability practices. market. We seek to invest in green One of our managers is a bond Engagement in private equity bonds that have at least a second After constant pressure, we’re opinion issued by a credible holder for a major UK retailer. Given the diverse nature of private independent body, as well as ensure It engaged actively with the pleased to report that nearly 90 that any relevant evidence is provided company throughout the past per cent of our alternative credit equity (PE) strategies, we take a year, focusing on crucial social assets are with managers who are nuanced approach to engagement on the green pro昀椀le. aspects due to the pandemic as now PRI signatories. This means within this asset class. Here, more than well as plastic pollution. they will need to meet the PRI’s anywhere else, we look to our managers minimum requirements, including to focus on the next link in the The company demonstrated TCFD reporting, but also gain investment chain. Taking action: reasonable resilience and access to education and networks Our interactions with general partners EOS, our stewardship provider, responsiveness in upholding for promoting best practice. (GPs) and expectations of how they expectations on employee health is also increasingly engaging with We have set this out as a clear engage with portfolio companies will Case study issuers from a debt perspective and bene昀椀ts over a challenging preference under our minimum di昀昀er from those we have with our on our behalf. During the year, year. It kept vulnerable sta昀昀 and requirements for all managers. secondary managers, and how they Building net zero carbon schools in Wales EOS engaged with a non-equity workers in self-isolation at home engage with underlying GPs. In terms of issuing Dutch 昀椀nancial institution with full paid leave at the outset control, we have greater expectations of the pandemic to minimise Engagement in infrastructure around stewardship where GPs hold We are keen to develop social It’s part of the Welsh 21st Century held in our long-term strategic health risks. infrastructure that goes beyond Schools Programme to meet the cash portfolio to encourage the We are pleased to note that Board seats or controlling stakes in housing. Through one of our growing demand for education companies. integration of climate change into The retailer also continues engagement e昀昀orts for this asset class infrastructure managers, we in the country. the bank’s strategy. The company to target more sustainable have made excellent progress, invested in the Welsh Education since published its 昀椀rst TCFD packaging by establishing a particularly around climate risks in listed During the year, one of our UK- Partnership (WEPCo). The facilities will be energy report and has started to focus closed loop for plastics. It has infrastructure assets. based GPs became a PRI signatory, its climate strategy on the worked with suppliers to remove meaning that 100 per cent of e昀케cient, built and maintained Through our investments, we aim to WEPCo will create schools and to high standards under a more exposed mortgage hard-to-recycle materials, with support the development of climate- our core PE managers are PRI other community-based facilities in ‘PassivHaus‘ net zero approach. and agribusiness areas of its industry-leading innovation to signatories. On the secondary create recyclable products, which resilient infrastructure that also adds side, many of our managers are Wales, from planning to 昀椀nancing, loan portfolios. help prolong the shelf life of social value. right through to maintenance. rapidly expanding their own goods and reduce food waste. The public-private partnership will monitoring of their sponsors’ create more than 30 new schools ESG practices, with increasing and colleges across the nation, with focus on TCFD reporting. We are an operation that will last 25 years. planning to roll out our ESG reporting templates to our PE managers shortly.

Pension Protection Fund Responsible Investment Report 2020/21 21 Engagement continued We have increased our Collaborating to investment in forestry address and mitigate and farmland by 20 per market-wide risks cent over the year. As part of our e昀昀orts to maximise the collective voice of the industry, we are members of key initiatives and engagements around a number of themes that are important to us. However, there are many initiatives, so we prioritise supporting workstreams in the markets where we’re active or rapidly developing new rules for better functioning markets to reduce systemic risks. For example, on climate change, we actively participate in the programmes run by the IIGCC and have contributed Engagement in forestry We make sure that we invest in, or to key projects focused on net zero frameworks and physical risks. Forestry can help mitigate CO only have exposure to, responsibly 2 managed forests and farmland. Taking action: We also work closely with policymakers emissions by storing carbon. This Over the year, we have and market stakeholders, such as makes sustainable forestry assets Year on year, the share of timberland in the PLSA, UK DMO and the DWP. one of a few viable nature-based increased our investment in solutions in the journey towards a the process of certi昀椀cation has slightly forestry by 20 per cent and increased, which is due to the fact that we continually review the net zero carbon world. Well-managed new assets have been acquired within forests can also increase biodiversity growing funds. Our managers commit proportion of our timberland and are more resilient to the e昀昀ects assets that are FSC and/or PEFC of climate change. to converting all new assets to certi昀椀ed certi昀椀ed. We receive regular forests as part of their post-acquisition, where possible, and it is something we reporting from our managers actively track. and are starting to consider the whole forestry commodities value chain. Certi昀椀cation of timberland (PPF’s share) 2019 proportion % 2020 proportion % 98.21% 93.09% Certi昀椀ed timberland in accordance with the FSC and/or PEFC Timberland in the process of certi昀椀cation in accordance with the 0.17% 5.83% FSC and/or PEFC Land that is sustainably managed in accordance with the FSC and/ 0.23% 0.01% or PEFC, but that cannot be certi昀椀ed Other 1.40% 0.27%

Pension Protection Fund Responsible Investment Report 2020/21 22 Engagement continued Key activities in public policy We engage with key entities globally on Other collaborations with industry • Although we’re committed to voting engagement over the year public policy that promotes and enables • We’ve been a signatory to the PRI all our shares, implementing policies Regulatory standards and guidance smooth market functioning. We carry since 2007; our Head of ESG currently – particularly in relation to pooled around ESG issues are rapidly evolving out this engagement directly or through sits on the PRI’s Infrastructure funds – is challenging, and improving and we follow these developments other groups such as our stewardship Advisory Committee and we’re shareholder voting is an important closely. provider, the PRI and the IIGCC. members of its Collaboration platform issue • As an investor member of the IIGCC, we recently joined its Net Zero Taking action: Stewardship Working Group. We also Taking action: participate in its collective responses Taking guidance from the newly Directly Through EOS to consultations, such as with the formed Taskforce on Pension TCFD on its forward-looking metrics Scheme Voting Implementation, DWP consultation: Taking action on In the past year we’ve been glad to proposal we’ve successfully agreed with climate risk – we responded to this see the results of engagement on • We encourage greater climate two of our public equity managers as we believe introducing Japan’s Corporate Governance disclosure through supporting initiatives to apply a split-voting approach standardised climate metrics is a Code revision. This included such as the CDP and the TCFD and the option to override votes crucial step to being able to development around Japan’s with our decision. measure climate alignment across sustainability disclosure and • We are supportive of the revised UK strategies. progress on the National Action Stewardship Code and its increased • The EU’s Sustainable Finance Plan on Business and Human drive towards greater transparency on Disclosure Regulation (SFDR) is a DWP consultation: Consideration Rights. In the UK, we provided stewardship activities and progress positive move towards transparency of social risks and opportunities input to the FRC on future and standardisation, which should – we responded to this as we corporate reporting and the Asset bene昀椀t asset owners such as already consider social factors Management Taskforce for ourselves. A growing number of our where material, for example stewardship. managers are aligning their reporting diversity and inclusion. with this regulation, for funds We also engaged with the UK’s classi昀椀ed under articles 8 and/or 9. HM Treasury consultation: Reform Home O昀케ce review of the Modern The coverage of assets committed of the RPI methodology – we Slavery Act information portal, varies, however with time we expect submitted a direct response to the under development, that would a larger share of mandates to adopt consultation during the year, allow the public to search for some ESG guidelines. expressing our views around companies’ modern slavery potential impacts to the PPF and statements. other DB schemes. Although our liabilities are indexed by reference to Net Zero Stewardship the Consumer Price Index (CPI), the Through the IIGCC absence of a liquid CPI market As a member of the IIGCC’s Net Zero means we largely use the RPI-linked As active members of the IIGCC, we Stewardship Working Group, we’re Gilt and RPI derivative markets to often join collaborative initiatives helping create practical approaches hedge our liabilities against in昀氀ation to help asset owners to engage on public policy. In the past year risk. The e昀昀ectiveness of this we signed the Global Investor around carbon emissions. There are strategy is important to our long- Statement, now supported by 587 two main workstreams: term viability and to limit calls on our investors managing $46 trillion, levy payers. urging all governments to raise their • Developing the resources and climate ambition and implement infrastructure that investors need robust policies by COP26 in to engage and exercise voting November 2021. rights with priority companies • Creating a framework that can hone engagement targeted to net zero. We also monitor the e昀昀orts of proxy voting providers to include clients’ needs, particularly around climate risk management

Pension Protection Fund Responsible Investment Report 2020/21 23 Engagement continued Our engagement progress This year, we and outcomes participated in the IIGCC workstream We’ve focused on three themes in particular for engagement during the last year: on setting investor expectations on physical risks. 1. Climate change Climate change is a key pillar of our As a result, we have ESG data available We also engage with companies such Climate Action The company also acknowledged the RI strategy and an ever-increasing through our portfolio system for as Rio Tinto, POSCO and McDonalds – need to enhance next iterations of priority that can a昀昀ect the pro昀椀le 70 per cent of the Fund’s net asset identi昀椀ed by Climate Action 100+ as 100+ focus TCFD risk assessments to include of our investments over the value. Within this coverage, we also large corporate greenhouse gas One of the companies held across consideration of impacts, such as short, medium and long term. have carbon emissions data for emitters – urging them to take a few of our portfolios is the demographic changes and population approximately 30 per cent of the total, necessary action on climate change. multinational retailer corporation movement. Through our stewardship activities, re昀氀ecting the di昀케culty in assigning Walmart. The company is part of the especially those with our managers, sovereign carbon emissions. We have started to examine the Climate Action 100+ list and has been Walmart disclosed the Board’s we seek to drive the progress alignment potential of our investments, engaged on various topics across ESG process for overseeing human capital on climate adaptation and move To drive further visibility, we’ve chosen covering our equity, 昀椀xed income, real themes, such as climate change, management, including the option to towards a net zero future. to focus on each asset class in turn estate and internally managed LDI designate an independent director and in a way that works best for each. strategies. The results of the analysis will Board e昀昀ectiveness and natural We have provided full detail on our further inform our stewardship activities resource stewardship. who has employee engagement work around climate in a dedicated This year, we also participated in and actions that we need to take to responsibilities. It also recognises TCFD report that shows how we IIGCC workstreams on physical drive our issuers to align with the As a result of continuous engagement, the importance of actively increasing assess and manage climate-related risk and welcomed its ‘Investor Paris Agreement. Walmart assessed the risk of potential Board diversity and has committed to implementing changes to rules risks and opportunities across our Expectations on Physical Risks and con昀氀icts between the company’s investment portfolio. Opportunities‘ guide. position on climate change and in director recruitment, ensuring support of the Paris Agreement and minorities representation. Over the past year, we’ve dramatically This gives practical guidance on Taking action: any activities of industry associations improved our oversight by expanding governance, assessing physical risk Over the coming year, we’ll be it is a member of. our ability to produce TCFD-related and opportunity, developing a assessing our entire portfolio metrics and analysis across our resilience strategy and tracking through a climate lens. This will portfolio management systems. metrics. With a focus on our portfolio, give us an independent, objective Net Zero Asset While some managers will implement we are in the process of augmenting benchmark and tangible steps for Managers initiative this across parts of their portfolio to physical risk data to measure exposure moving forward. start with, it’s positive to see them set across the board. 15 of our managers have become targets and we’re looking forward to signatories to the Net Zero Asset 昀椀nding out how they implement the Managers initiative so far, including commitments and track progress. two managers in infrastructure, one in forestry and one in emerging markets.

Pension Protection Fund Responsible Investment Report 2020/21 24 Engagement continued 3. Human and labour rights As a responsible asset owner Taking action: and employer, we focus on the importance of a fair and equitable FTSE Modern Slavery Driving disclosure at workplace. We recognise the responsibility of all companies to compliance ConocoPhillips respect human rights and provide decent work conditions and a living wage to employees. The COVID-19 pandemic further highlighted This year, we participated in a Following the Deepwater Horizon successful coalition to ensure UK oil spill disaster, EOS began the urgency of establishing the necessary protocols, which we FTSE 350 companies comply with engaging with crude oil producer continue to review across issuers. the UK Modern Slavery Act. The PRI ConocoPhillips in 2010. It met and coordinated the initiative, one of the corresponded with several directors, We have hit key milestones when largest to date, and brought together setting objectives around health and working with a broad set of 97 investors with assets of £7.8 trillion safety, disaster response risk stakeholders, for example, with to actively engage on the issue during management, oil sands risk and the AGM season. climate disclosure. the progress seen through the PRI’s Collaboration Platform where 62 companies either didn’t have Board The company has completed many we focused on Modern Slavery Act compliance within FTSE 350 signo昀昀 on their modern slavery annual of these objectives, convincing EOS companies over the year. statements or hadn’t published them. that it is an industry leader in health 1054 PPI and safety and disaster recovery, 2. Diversity and inclusion Following the coalition’s engagement, with excellent oil sand production most companies have responded practices. Case study Diversity and inclusion is an area positively, and 56 of them are now Driving leadership diversity at Nintendo compliant. We have also seen progress in its of growing importance to the climate reporting, as it now reports investment industry and a key We were also pleased to see the Home on three 2°C scenarios. It has also priority for us as an organisation. We’re continually developing our EOS and one of our pooled fund Nintendo also improved its O昀케ce’s update of statutory guidance set out a climate change action plan. internal initiatives and are active managers have been engaging with disclosures by producing its annual under the Modern Slavery Act 2015 EOS continues to encourage the members of the Diversity Project. Nintendo on Board diversity for report in English and included this year. company to improve its disclosure, several years, emphasising the need information on cross-holdings, governance, lobbying activity and to improve gender diversity and an important aspect of potential We are keen to see the scope of the factoring climate into executive pay. independence, improve disclosure interdependence at Japanese initiative progress beyond an Taking action: engagement focused solely on This year, we went further and increase discussion of diversity companies. We also asked for compliance, to driving improved quality on Board agendas. increased workforce 昀氀exibility than publishing a gender of reporting as well. pay gap report, and published in the form of maternity leave. our 昀椀rst diversity pay gap Although we continue to engage with Nintendo, we have seen Nintendo has also committed to 505 PPI report as a demonstration positive progress as a result of increasing its female workforce of our commitment. We also these engagements. The company from 20 per cent to 25 per cent set targets for ethnicity has recently appointed its 昀椀rst and strengthening its talent representation at all levels female Board member, established management programme to of the organisation. a nomination advisory committee establish a pipeline of senior and expanded the number of female executives. Along with reviewing diversity independent directors on the Board. e昀昀orts at our issuers, we now collect diversity data as part of selecting our managers. We feel it is important to see our managers re昀氀ecting this in their own organisations too.

Pension Protection Fund Responsible Investment Report 2020/21 25 Voting Our 昀椀rst RI report and our stewardship Our guidelines for voting Where we feel engagement has not policy provide detail on our approach been fruitful, we may vote against to voting in our segregated equities. management on certain resolutions, such as reports and accounts or How we escalate We commit to voting every share we electing individual Board members important issues hold, except when it’s cost-prohibitive or responsible for poor environmental or not possible due to operational reasons. social performance. While EOS votes on our behalf, we Where an engagement is not will review votes across key topics in advance. These key topics are aligned Taking action: progressing at a su昀케cient pace privately with the voting guidelines issued by with the company, there are a range of We’re developing speci昀椀c voting potential escalation strategies that we the PLSA and include: guidelines for the next AGM season can employ, including collaborating with • Board leadership and company to make sure we vote in line with other investors or campaign groups, purpose our key priorities. We will also be • Division of responsibilities, e.g. issuing a public statement or 昀椀ling a separation of chair and chief executive reviewing our policy around shareholder resolution. • Composition and diversity of Boards stocklending and recalling stocks Voting against Board recommendations and executive committee out on loan for voting purposes. is an important tool we can use • Audit, risk and internal control as part of a thoughtful escalation • Remuneration Our criteria for signi昀椀cant votes when necessary. However, we would • Climate change and sustainability Along with the guidance of the PLSA always look to engage with the • Capital structure and allocation company at Board or management • Company strategy, vision and around signi昀椀cant votes, we also use our level to discuss this in advance. business model own criteria to 昀氀ag material votes that we need to scrutinise more carefully. We closely follow the AGMs of companies targeted by Climate Action 100+ and discuss with our managers if Taking action: there is an important vote to be cast on We’ve created a watchlist where our behalf. We are also reviewing the we get particular coverage and new trend of formal shareholder votes on companies’ climate transition plans. have an agreed timescale for However, we recognise the dilemma action to proactively execute that the majority of shareholders votes for signi昀椀cant and material aren’t likely to have reviewed the Taking action: positions in our portfolio. robustness of these plans in thorough For example, we use the Transition Pathway detail. This could lead to them just Initiative’s (TPI) assessments of companies to help Our watchlist includes: ending up supporting management guide our climate-related votes executed via EOS. rather than encouraging a company The TPI provides a useful framework for setting to be as ambitious as possible. stretching but achievable engagement objectives on • Companies where we have over climate change. EOS has had a formal climate 1 per cent ownership of equity change voting policy that uses the TPI management • Companies that we hold directly, quality scoring system since 2019. Over the last year, which we escalate to our CIO the voting policies for certain regions – including for decision Our voting policies for the UK – now consider opposing the chair or other • Companies with speci昀椀c issues, certain regions now directors at companies falling below a Level 4 e.g. practices that are non- consider opposing the management score, up from the previous Level 3 compliant with the UN Global threshold. Compact chair or directors at • Votes related to a speci昀椀c initiative companies with a low that we’re involved in, such as our TPI score. holdings on the Climate Action 100+ list and related shareholder resolutions

Pension Protection Fund Responsible Investment Report 2020/21 26 Voting continued How we voted Voting statistics April 2020 – March 2021 Response Voting for segregated equities How many meetings were we eligible to vote at? 591 On a quarterly basis our voting and engagement reports are uploaded on How many resolutions were we eligible to vote on? 6,897 our website. In the table to the right, we present our segregated equities voting statistics for the period April 2020 to What % of resolutions did 100% March 2021, cast on our behalf by EOS. we vote on for which we were eligible? Voting against management is broadly Of the resolutions on which we voted, what 88% seen as an escalation action towards % did we vote with management? company management. The table on the far right presents a Of the resolutions on which we voted, what 11% split of our votes cast per topic of the % did we vote against management? shareholder resolutions 昀椀led. In some cases, the shareholder resolutions are Of the resolutions on which we voted, what 1% withdrawn prior to the meeting or when % did we abstain from voting? su昀케cient progress through engagement has been achieved with the speci昀椀c In what % of meetings, for which we did vote, 59% company, precluding a vote against a did we vote at least once against management? resolution. Taking action: Shareholder resolutions We voted on a total of 6,897 Voting by number Voting against management resolutions, the vast majority of of meetings or abstaining by issue April 2020 – Grand which (over 95 per cent) were March 2021 Abstain Against For total Shareholder resolutions proposed by management. 10% 4% 5% 0% Compensation 8 6 14 1% 6% 180 36% 7% Corporate 2 1 13 16 160 46% Governance 153 140 10% Governance/ 7 37 61 105 Directors’ related 120 53% Climate & 21 13 34 100 22% Environment 100 Other 5 22 27 80 Meetings in favour Board Amend articles 60 Meetings against (or against structure Audit & Routine Business 28 29 57 and abstain) Remuneration accounts 40 Meetings abstained Shareholder Other Social equity 4 4 20 resolution Investment/ & Human Rights Meetings with management Social Proposal 5 5 0 9 Capital M&A by exception Abstain Against For structure & dividends Grand total 9 100 153 262 In terms of regions and where we cast our votes, the most active region in terms of resolutions were Emerging Markets and North America, followed by Asia.

Pension Protection Fund Responsible Investment Report 2020/21 27 Voting continued Votes on shareholder resolutions The most active Voting in pooled vehicles per region markets were We are in the process of setting up a 5% 1% Developed Asia Emerging Markets, process for using our stewardship provider’s platform to monitor statistics 25% EM and Frontier markets North America and on votes cast on our behalf through 27% Europe Developed Asia. pooled mandates. We will then be able North America to raise any practices or voting actions that don’t align with our expectations in UK our discussions with pooled managers. Australia & NZ While our views do generally align with 11% 31% our managers’, we’re keen to exercise a consistent voice on key topics. Where we’ve been able to, we’ve taken advantage of a split voting Climate-related voting set-up to allow us to vote on or While we strongly encourage climate- ‘override‘ our shares in a pooled related stewardship across our fund. We have put this in place for investment portfolios and asset classes, two of our global equity mandates we direct our own voting within our this year. segregated equities. For mandates where this isn’t possible, we carry out ex-post assessments Taking action: of voting activities for our portfolio across our key topics or most material In the past year, as shown in the issues. When they’re allowed to share table on the previous page, we information, we 昀椀nd out how our voted on a total of 34 shareholder managers intend to vote on high-pro昀椀le resolutions speci昀椀cally related to issues ahead of AGMs. However, we climate and environmental issues acknowledge the challenges with pre- within 16 companies. declaring votes, and would welcome any action to address this in future. We voted in favour for inclusion of the Making voting more This makes it hard to position our Paris Agreement 1.5ºC Target in Articles transparent votes ahead of meetings and creates of Association of the Finnish power Taking action: the risk of misaligned voting for the producer Fortnum, a Climate Action Over the past year, we voted in We would welcome further regulatory same company. Greater transparency 100+ target company. We also voted in 5,555 meetings on more than guidance around voting rules and would prevent potential discrepancies. favour of corporate disclosure on 76,000 resolutions across six transparency in pooled funds. addressing stranded carbon asset risks An additional barrier to all of our with the American natural gas company pooled mandates with applicable We have encountered signi昀椀cant Cheniere Energy. ballots. We supported more than challenges and barriers to overcome ballots being voted is created if a fund 50 per cent of all shareholder around voting, particularly with manager sets a materiality threshold Within our externally managed pooled accounts. for when to cast votes. This is often resolutions in two mandates and based on the share of ownership accounts, some of the signi昀椀cant climate 41 per cent in a third pooled fund. For example, our managers use for a position. For non market- votes cast were at the annual AGMs of cap weighted strategies, this can fossil fuel majors such as BP, Eni, Vale Within our passive equity strategy, di昀昀erent proxy voting providers and and BASF. we voted on 2,049 shareholder reporting formats. Not all managers result in a high number of positions resolutions, 199 of which were will pre-declare their voting intentions. being considered out of scope, related to climate and which is in con昀氀ict with our policy environmental issues, while 34 to vote all shares where possible. were related to social equity and human rights. In 18 per cent of cases we voted against management.

Pension Protection Fund Responsible Investment Report 2020/21 28 Looking forward By keeping active stewardship at the heart of everything we do, we will continue to advocate Climate change will for improved management and outcomes related remain a priority to the climate, diversity and inclusion, and better for us. We’re looking working conditions. forward to seeing Our immediate actions for the next 昀椀nancial year the results of our include measuring our assets through a climate portfolio alignment assessment of the entire portfolio. More speci昀椀cally, project across our we’ll continue developing our TCFD disclosure and entire portfolio. improve our analysis of physical climate-related risks. We will also explore further potential Barry Kenneth opportunities for sustainable investment in asset Chief Investment O昀케cer classes such as forestry and infrastructure. While we are keen to keep evolving, we have Getting in touch worked hard to set a baseline for understanding material ESG and climate-related risks. We’re now at the stage in our journey where we’re able to Claire Curtin manage and act on these risks. We will continue to Head of ESG develop our stewardship practices in a way that we [email protected] believe will reduce the risks that our investments Iliana Lazarova are exposed to. This will include implementing Senior ESG Analyst [email protected] bespoke voting policies for our key themes. When it comes to working with our external managers, we will also seek to achieve continued Visit our website to read our improvements in transparency and reporting across latest news and reports. our pooled funds and segregated mandates. At an industry level, we will actively support Follow us on Twitter @ppf stewardship practices and collaboration with peers to drive long-lasting change in our focus areas.

Pension Protection Fund Responsible Investment Report 2020/21 29 Appendix Appendix 1 The information in this report is intended to meet the # UK Stewardship Code principle Report section Page reference reporting expectations against the FRC Stewardship 1 Signatories’ purpose, investment beliefs, strategy and culture enable Messages from our Chair, 5–6, 8 Code’s 12 principles. The table to the right describes how the report relates to the Code. stewardship that creates long-term value for clients and bene昀椀ciaries leading CEO and CIO; Purpose and to sustainable bene昀椀ts for the economy, the environment and society governance 2 Signatories’ governance, resources and incentives support stewardship Purpose and governance 9 3 Signatories manage con昀氀icts of interest to put the best interests of clients Purpose and governance 10 and bene昀椀ciaries 昀椀rst 4 Signatories identify and respond to market-wide and systemic risks to promote Engagement 21 a well-functioning 昀椀nancial system 5 Signatories review their policies, assure their processes and assess the Purpose and governance, 9, 11, 14, 17–19 e昀昀ectiveness of their activities ESG integration, Engagement 6 Signatories take account of client and bene昀椀ciary needs, and communicate the Key achievements, ESG 4, 11 activities and outcomes of their stewardship and investment to them integration 7 Signatories systematically integrate stewardship and investment, including ESG integration 12–13 material environmental, social and governance issues, and climate change to ful昀椀l their responsibilities 8 Signatories monitor and hold to account managers and/or service providers ESG integration, Engagement 14–15, 18–21 9 Signatories engage with issuers to maintain or enhance the value of assets Engagement 16–21, 23–24 10 Signatories, where necessary, participate in collaborative engagement to Engagement 16–17, 19, 21–24 in昀氀uence issuers 11 Signatories, where necessary, escalate stewardship activities to Voting 25–26 in昀氀uence issuers 12 Signatories actively exercise their rights and responsibilities Voting 25–27

This report contains certain information (the “Information”) sourced from MSCI ESG Research LLC, or its a昀케liates or information providers (the “ESG Parties”). The Information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any 昀椀nancial instruments or products or indices. Although they obtain information from sources they consider reliable, none of the ESG Parties warrants or guarantees the originality, accuracy and/or completeness, of any data herein and expressly disclaim all express or implied warranties, including those of merchantability and 昀椀tness for a particular purpose. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such, nor should it be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. None of the ESG Parties shall have any liability for any errors or omissions in connection with any data herein, or any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost pro昀椀ts) even if noti昀椀ed of the possibility of such damages. The Pension Protection Fund Renaissance 12 Dingwall Road Croydon CR0 2NA www.ppf.co.uk