22 Pension Protection Fund Responsible Investment Report 2021/22 OUR APPROACH TO ENGAGEMENT CONTINUED Partnering with our Examples of our ODD team working with external managers Our minimum requirements of external managers external managers • Should be an active signatory to the Principles Example 1: Ensuring operational standards We engage deeply with our external managers both during for Responsible Investment (PRI) or considering our initial selection process and on an ongoing basis to becoming a signatory; The ODD team worked closely with our Alternative Credit ensure they can meet our high standards on stewardship • Must provide evidence of a Responsible Investment investment team to onboard a new service provider to play and ESG. Throughout our relationship with managers, we (RI) policy and implementation of Environmental, a prominent role in the sourcing and management of a new encourage constant improvement in their approaches to Social and Governance (ESG) considerations within asset class. Given the prominence of the service provider’s managing ESG and climate-related risks. In addition, we investment decision-making and active ownership role, the ODD team extended the scope of their due diligence use the insights from our stewardship services provider that covers the proposed fund or mandate; or must to include an assessment of the 昀椀rm’s operational and EOS in their engagement with issuers on material ESG have a commitment to implement such a policy no control environment. Following the review, the ODD team management to inform our conversations with our later than 12 months from the PPF’s initial investment; identi昀椀ed that the service provider’s insurance coverage was managers about their own engagement on these issues. lower than the industry standard. Following our feedback, • Must accommodate inclusion of the PPF’s standard the 昀椀rm agreed to increase their coverage. Our manager selection process ESG and RI clauses within the fund terms (or provide As part of our initial manager selection process, we include a marked-up version with any minor amendments Example 2: Recommending best practice an ESG Questionnaire. This is a scored mandatory list of sought by the manager’s counsel) and be able to Our ODD team conducted an assessment on a new questions that prospective investment managers must apply the PPF’s exclusion lists, as appropriate; infrastructure manager that was in a transitional state, answer on a pass/fail basis in order to progress through • Must provide fund-speci昀椀c ESG reporting; having recently initiated a process to break away from the tender process. • Must have a diversity & inclusion policy with its regulated sister company. At the point of investment, clear implementation within relevant internal the manager had submitted a formal application for its The ESG Questionnaire comprises several sections, management processes; own regulatory authorisation. The timing of the change including: Governance & Alignment; Diversity & Inclusion; introduced a degree of uncertainty in the ODD assessment, RI Policy & Strategy; ESG Incorporation; Integration & • Must complete the PPF’s ESG Questionnaire, with no primarily because the manager was reliant on the policies/ Risk Management; Stewardship & Active Ownership; and signi昀椀cant risks or issues 昀氀agged by the ESG team. procedures of its regulated sister company. Reporting. Appendix F shows a sample list of questions The ODD team recommended a number of best practice within the Stewardship section of the questionnaire. Our pre-funding and appointment process enhancements to certain aspects of the 昀椀rm’s operational See the box on the right for our minimum requirements From a legal perspective, our stewardship expectations are processes, policies and governance. More speci昀椀cally, the of managers. integrated into all contracts. See Appendix G for examples ODD team provided guidance in relation to the manager’s of clauses. Our ODD team also works closely with new and gifts and entertainment policy, personal account dealing existing managers to ensure they continue to meet our policy, whistleblowing policy, valuation governance and requirements and identify any gaps or challenges that arise. service provider oversight model. The team continues to Throughout our relationship work with the manager to ensure best practice is being with managers, we encourage followed in these areas. constant improvement in their approaches to managing ESG and climate-related risks.