16 Pension Protection Fund Responsible Investment Report 2021/22 OUR INVESTMENT APPROACH AND INCORPORATING ESG CONTINUED Our approach to ESG integration Leading on RI standards We expect our external managers to in昀氀uence issuers, Given our size and the global reach of our assets under regardless of asset class, and update us on their actions. Embedding ESG considerations across the portfolio We strive to extend our management, we have the opportunity to encourage This includes engagement and taking part in collaborative In line with our RI strategy, detailed in our 昀椀rst RI report improvements in our investment portfolio across the world. initiatives, and being transparent about voting where and on our website, we embed material ESG considerations stewardship activities across We see this as an area where we can in昀氀uence and help we have ballots. We regularly carry out in-depth reviews right across our investments and our work with external our entire investment portfolio, set new standards for the asset management industry, of their activities to assess how they’re engaging on managers, from selection through to ongoing monitoring particularly among private market asset classes with our behalf. We particularly scrutinise their stewardship, and reporting. We also engage with our underlying amending our approach less-developed stewardship practices. especially in relation to our key themes including climate issuers and use our voting powers to advocate for strong change, human and labour rights, D&I board governance ESG practices. depending upon the asset Listed equities have the best-established stewardship and executive remuneration (see graphic). practices. But – as shown on page 15 – they only make Increasing our internal access to portfolio data class or strategy managers up a relatively small component of our portfolio. In asset We regularly review the services of our main ESG data across a range of vehicles. classes where good stewardship isn’t fully established, provider, MSCI, which is rapidly expanding its breadth and we aim to identify and encourage the most e昀케cient depth of analysis, especially within climate-related scenario approaches. Our regular review meetings with our analysis. Much of this expansion feeds directly into our fund managers often include education around these main portfolio management system (Aladdin), so we can approaches and emerging developments. run comprehensive ESG assessments for our listed Equity Setting exclusions and Credit portfolios on the 昀氀y. We have broader ESG data We insist on a high level of responsible conduct from our and scores available through our portfolio management underlying issuers, and seek to avoid investing in issuers systems for 70 per cent of the Fund’s net asset value (NAV), that contravene international conventions or norms for Our key themes accounting for almost all of our listed holdings. controversial activities that are rati昀椀ed into UK law – for We have more recently acquired access to a new example, the production of speci昀椀c controversial weapons. Environment Social sustainability insight module in our private markets We implement this through a small exclusion list, which is • Climate change • Conduct, culture and ethics investment software, eFront, which allows us to conduct applied across our fund as far as is practically possible. • Natural resource stewardship • Human capital management key ESG risk analysis for our Alternatives funds. Data Engagement and voting • Pollution, waste and circular economy • Human and labour rights availability is still limited, however, and more progress is needed, especially on carbon emissions and company As outlined in our full Stewardship Policy, we strive exposure to transition and physical risks. See below and to extend our stewardship activities across our entire more detail in the case study on page 21. investment portfolio. We amend our approach depending upon the asset class or strategy, how directly we’re invested in it and the level of control we’ve been granted. Taking action We believe in engagement as a path for veri昀椀able and tangible impact, focused on material issues. We’re We have joined eFront’s ESG Outreach pilot project, strong advocates for supporting companies in building which is working with private equity and credit and sustaining good governance and progressing their managers to collect relevant ESG metrics on their practices on environmental and social matters. In order to underlying portfolio companies to feed into investor incentivise our issuers and companies, we are committed reporting – an important step in addressing the lack to transparent voting following a robust assessment and Strategy, risk and communication Governance of ESG data and reporting from private companies. review of the practices of a company. As discussed later • Risk management • Shareholder protection and rights in this report (from page 31), we are currently looking • Corporate reporting • Executive remuneration at ways to share detail on our voting behaviour via our members website. • Business purpose and strategy • Board e昀昀ectiveness