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.