20 Pension Protection Fund Responsible Investment Report 2021/22 OUR APPROACH TO ENGAGEMENT CONTINUED Engagement approach for assets Equity issuer engagements IG credit issuer engagements Sovereign issuer engagements managed externally Some examples of Equity issuer engagements during Example 1: Pushing for better due diligence in Example: Engaging on human rights issues We take a multi-pronged approach to engagement for our the period the European water sector One of our EMD managers engaged with a sovereign externally-managed assets, driven by the following factors: IG Credit Manager A engaged with a large European entity to highlight the importance of the rule of law Example 1: Driving for regenerative practices in Water company to understand its sustainability and encourage the government to act in this area. The • We allocate across many asset classes using a range of the Food sector external fund managers whom we engage with directly journey. Management showed little ambition to sovereign entity did not address a pending legal case and instruct to engage with issuers on our behalf Equity Manager A has challenged companies in the strengthen its existing targets for renewable energy that potentially violates human rights but referred to Food sector to adopt comprehensive deforestation or reduce its carbon intensity (CO et/USD million judicial reforms and promised further improvement. • Our asset allocation to Public Equities is much lower and regenerative agriculture policies. The manager 2 than most pension schemes, however we do employ sales), which was higher than some oil majors. Given Our manager left the meeting unsatis昀椀ed with the has seen progress on regenerative farming and limited these factors plus poor governance in one country government’s actions and promises. After factoring in a passive strategy for some of this, so we engage an net-zero target setting covering scope 3 emissions. in which the company currently operates due to a the country’s weak score on ‘Rule of Law, Corruption external stewardship services provider (EOS) to carry out However, it reports it is yet to see comprehensive recent acquisition, the manager decided to sell its and Voice and Accountability’, the manager decided direct, issuer-level engagement for greater e昀케ciency deforestation policies in place. The manager has position entirely. to pass over the latest bond issue and reduced its • Our Equity index is a highly diversi昀椀ed, alternatively- therefore escalated the engagement by voting against overweight and has since put the sovereign entity weighted index (comprising around 3,000 names); the chair of the board of these companies and naming Example 2: Pursuing and promoting on its watchlist. we therefore look to leverage collaborations engaging the companies publicly. climate opportunities entire sectors or across companies on systemic issues Example 2: Addressing sustainability and forced IG Credit Manager B met with a European Utility (e.g. climate change and modern slavery) company to discuss opportunities to improve Absolute Return – For our Absolute Return mandates, we labour in the Textiles, Apparel and Luxury sustainability. The manager was pleased to see have predominantly monitored our physical investments Goods sector that the company was committed to reaching to date (leaving derivatives or synthetic instruments aside Engagement options for externally- Equity Manager B has engaged in two consecutive carbon neutrality by 2050 and to issuing sustainable- for now). The two areas of most relevance have been managed assets quarters with a leading Textiles, Apparel and Luxury labelled debt. positions in our long/short equity or credit and event-driven Engaging via Engaging Engaging via Goods company. In the 昀椀rst call, the goal was to strategies, where our managers have engaged directly with EOS with our collaborations understand the company’s targets on sustainable The company outlined opportunities to improve energy corporate issuers. managers & networks sourcing and waste prevention initiatives. In the recovery from waste, recycling, and material recovery, second call, the manager challenged the company on and presented capital expenditure plans aligned with Absolute Return engagements forced labour. The company con昀椀rmed that it expects the UN Sustainable Development Goals. Despite the its suppliers to adhere to its code of conduct, which company’s legacy exposure to coal (currently 2 per cent Example: Strengthening governance for has forced labour as a key risk to consider. of EBITDA) the manager is comfortable with the Utility’s minority shareholders sustainability targets and believes the company is on the One of our Absolute Return managers is engaging Example 3: Encouraging climate targets in the right path to achieve its goals. with several companies on governance. Speci昀椀cally, Issuers Industrial Engineering sector it looks to engage on the protection of minority Equity Manager B also has engaged with a Japanese Sovereign Debt – Debt issued by governments is a shareholders, board independence, con昀氀icts between industrial machinery company to encourage alignment fundamental asset class for nearly every asset owner and management and shareholders, and to improve with Japan’s recent climate announcements. Following a pillar of a well-functioning economy. Engagement in governance to avoid repeated accounting errors. How we engage with listed equity issuers this engagement, the company announced targets to emerging market debt (EMD) is crucial where dialogue Engagement with our Public Equity issuers will depend on produce net zero emissions by 2050 and interim targets with governments requires a concerted e昀昀ort over time. Companies with which the manager engaged the mandate construction. For segregated equity portfolios, for Scope 1 and 2 emissions and its largest source of Investors’ voices are also vital for pressing topics such as during the period are operating in US Investment EOS engages on our behalf, and we have full access to Scope 3 emissions, achieving the engagement objective. addressing the energy transition and deforestation. Banking and Brokerage, French Retail-Consumer the EOS database and reports for monitoring the progress Discretionary, French Software and Services, of these engagements, as well as the opportunity to join We welcome the evolution of tools and data sets that and German Semiconductors & Semiconductor speci昀椀c meetings where possible. See the section on page How we engage with publicly-listed debt and deepen the ability of investors to measure climate-related Equipment sectors. 24 for how we engage with our issuers and progress on our other securities and other ESG risks in relation to sovereign bonds. We listed equities engagement. Investment Grade (IG) Credit – We continue to be encourage our managers to contribute knowledge and encouraged by the progress in engagement practices resources to drive this progress forward. For pooled equity funds, the relevant manager will engage among IG Credit managers. We’re pleased that all of on our behalf, so our engagement e昀昀orts focus on the our managers in this asset class regularly report their manager itself. Our quarterly ESG reports from these stewardship progress to us. We see engagement with managers provide detail and allow for our oversight of debt issuers as having a longer-term focus, given their their engagements, progress and outcomes – see the ongoing need to reissue debt, which is well suited to following examples. our investment pro昀椀le.