17 Pension Protection Fund Responsible Investment Report 2021/22 OUR INVESTMENT APPROACH AND INCORPORATING ESG CONTINUED Ensuring our external agents are Oversight of our external investment managers CASE STUDY aligned with our approach Generally speaking, we expect our fund managers Embedding social value into our External agents such as third-party investment managers to focus on the next link in the investment chain and a specialist stewardship services provider are critical to (i.e. which underlying companies or fund managers procurement process helping us manage our investment portfolio e昀케ciently and they are allocating to). responsibly. We continually monitor our agents’ practices in We are now trying to ensure alignment with our order to keep improving the quality and coverage of their We apply robust RI requirements that all our external principles beyond just our investments, with our stewardship activities and ensure consistency with our managers must meet prior to investment (and on an largest suppliers too. During the year we piloted an own investment beliefs, policies and guidelines. ongoing basis), to ensure we are all aligned. We will not approach to evaluating social value within our own appoint or allocate more capital to managers that fall procurement process. These pilots have achieved A holistic oversight of our external agents is carried out short of these standards. See page 22 for further detail positive outcomes, with bidders demonstrating across the Investment team, ESG team, Operational Due on our manager appointment process, including our actions they’re taking in areas including employee Diligence (ODD) team and the Commercial Services team, minimum requirements and examples of how we wellbeing, community engagement, social capital ensuring robust analysis in the selection process and have engaged with managers prior to funding. and the environment. throughout the life of the relationship. We require disclosure of all existing and potential For example, when the contract with our investment Oversight of our stewardship services provider managers’ policies, ESG integration and stewardship custodian was up for review, we took the opportunity We have chosen to outsource stewardship activities for processes and reporting to ensure they meet our to make social value an important part of the tender. our segregated listed issuers to EOS, part of Federated evolving expectations (see Appendix H). Regular Proposals were scored on metrics including suppliers’ Hermes, to ensure that our shares are voted cost-e昀케ciently stewardship reporting is already required from all carbon reduction plans and commitments to D&I. and companies are engaged with where ESG concerns managers of our public markets strategies, and the quality of this reporting feeds into our ongoing The evaluating panel assessed the practices and arise. Our 2020/21 RI Report provided more detail on our monitoring and ratings process. We are now asking commitments from the successful bidder, Northern selection process for these services. the managers of our private markets strategies to Trust, including their net-zero commitment, carbon We carry out oversight of EOS’s engagement services provide this reporting as well. reduction plan, commitment to ESG reporting to meet for both our segregated and direct investments. EOS also TCFD requirements, and D&I reporting. Although we’re provides voting recommendations to us for our segregated Our external managers are also reviewed by our in the early stages of this journey, we’re building a equities, in line with their published corporate governance dedicated ODD team on a scheduled review basis. clear picture of how our procurement practices can principles. However, we are always in control of the The ESG team works closely with the ODD team to impact society and the environment, and what actions vote and have the ability to exercise our voting rights ensure that ESG considerations are fed into the review we can take to reduce negative impacts. in segregated holdings in line with our own policy process. We screen for reputational risks associated and principles. with personnel and request updates on their 昀椀rm’s D&I metrics in our annual ODD questionnaire, which is sent to all managers. The ODD team also reviews managers’ policies in key areas such as ethics, business continuity, Taking action disaster recovery and money laundering. We monitor EOS’s activities through regular contact Assuring manager alignment with our principles We apply robust RI via email and calls, more formal quarterly client Our ESG review process (see Appendix H and F for requirements that all our meetings and have fed back to them extensively more detail) is an essential part of selecting, appointing on the usability of their client portal over the last and monitoring our managers to ensure that their external managers must meet. year. We also participate in their semi-annual client activities align with our principles. We continuously We will not appoint or allocate advisory council meetings. monitor our managers’ progress through regular reports on stewardship activities, ESG-related risks and climate- more capital to managers that This year we discussed the 昀椀ndings from our Paris related information. When we raise issues with speci昀椀c Portfolio Alignment Project (see page 27) to see how managers, we report this to our Investment Committee. fall short of these standards. we can incorporate some of our action points around Net Zero stewardship into their service, especially During the year, we recommended carving out a more in relation to engaging with emerging markets explicit ESG score in the RFP evaluation stage, to increase companies where there is still little disclosure on accountability and transparency. This was approved by these issues. We also discussed the votes around our Investment Committee. climate transition plans in more detail ahead of the AGM season and how best to hold companies to account against our expectations.