19 Pension Protection Fund Responsible Investment Report 2021/22 OUR APPROACH TO ENGAGEMENT CONTINUED Engagement approach for assets CASE STUDY As a participant in derivatives markets, we already we manage internally have an established risk oversight process for our bank Internal credit issuer engagements Update on the UK’s Green Gilts counterparties. However, we are exploring how to further Some examples of credit issuer engagements carried We manage approximately half of our assets by value embed ESG considerations and ESG practices of banks out during the period: internally (see page 15), all of which are in various forms During the year, after previously engaging with the in order to strengthen our ongoing assessments of of 昀椀xed income assets. Industry-wide, engagement with DMO through investor roundtables and being part of counterparty risks related to ESG issues. Example 1: Engaging with a US 昀椀nancial services 昀椀xed-income issuers is at a very early stage of development, collaborative engagements through the Institutional Through our Paris Portfolio Alignment Project, we have issuer on D&I partly due to investors’ limited in昀氀uence in many areas. Investors Group on Climate Change (IIGCC) and the identi昀椀ed that the downstream activities of many banks are EOS has been engaging with one of our US However, engagement is developing and its importance Impact Investing Institute, we participated in the DMO’s likely to be misaligned with a 1.5°C pathway (especially their 昀椀nancial services credit issuers on D&I since 2019, is becoming increasingly appreciated. two autumn green gilt issuances. These were both lending portfolios). Therefore, we feel that a sector-based when they highlighted a need for greater diversity We take a variety of approaches to engaging on these asset heavily oversubscribed after seeing unprecedented approach to engaging on this issue will likely be the most in senior management at a meeting with the classes, largely depending on the maturity of the asset and demand, and we have continued to evaluate how we e昀昀ective. We are currently reviewing ways to carry this out corporate secretary. Following this and subsequent whether the issuer is corporate or sovereign/quasi-sovereign. think the ‘greenium’ will play out over time. for our counterparties and 昀椀nancials holdings across the correspondence, in November 2021 the company fund, including evaluating the recent IIGCC framework announced the appointment of a second ethnic However, being an active owner, our attention does that assesses banks on the transition to Net Zero. minority member to the executive committee. The Engagement options for internally- not end there. We expect there to be continuous company’s operating committee now contains several managed assets engagement between investors and Government to Engagement in our UK hybrid and strategic cash assets non-white members. The company also agreed that discuss project progress over the lifetime of the debt, We take a nuanced approach to engagement within our work still needed to be done with its employees Engaging via Engaging Engaging via especially in terms of the use of proceeds. We are UK Hybrid Assets, given that part of the book is invested in and to increase its non-white supplier spend and EOS directly collaborations awaiting the publication of the annual allocation report public credit and part in private credit. These are generally its commitments to non-white customers. & networks for the inaugural issuances, which should provide more longer duration assets, so di昀昀er from our strategic cash detail to investors on where the proceeds have been book which is much shorter in duration. Example 2: Engaging with a strategic cash issuer allocated (or not) and the share of proceeds used to on its climate strategy 昀椀nance existing versus future expenditures. There will As largely listed instruments, our Public UK Credit and EOS engaged a large Japanese 昀椀nancial institution on also be an impact report published in the following year Strategic Cash books have reasonable ESG and carbon data its climate-aligned 昀椀nancing strategy. The company detailing the environmental and social impact objectives coverage within our portfolio management systems. We adopted a policy in 2019 that included a ban on that have been achieved so far. can use these systems to monitor the portfolio regularly, lending to certain new coal power generation projects. Issuers along with assessments from open-source initiatives. For However, the company was not clear on what quali昀椀ed example, being an investor member of Climate Action as exceptions. EOS engaged the company, welcoming 100+ has helped us understand and engage with European the target to reduce its project 昀椀nancing on coal power Engagement in our UK LDI assets energy corporates on their transition plans when reviewing by half by 2030 and to zero by 2040, but pointed out their debt instruments for inclusion in our portfolio. the lack of speci昀椀c targets. EOS encouraged a strategy One of our aims is to improve the e昀케ciency and functioning with targets in alignment with the Paris goals. EOS also of markets through collaboration with stakeholders and We have placed our Public UK Credit and Cash assets under strongly encouraged the company to incorporate a policymakers on important issues. As a major participant the remit of our external stewardship services provider EOS, threshold on coal into its policy for corporate lending. in the UK Government Gilt market within our LDI assets, who engage with debt issuers on our behalf. EOS are also we regularly engage with the UK Debt Management broadening out their service and platforms to allow us to Following this engagement, the 昀椀nancial institution O昀케ce (DMO) and HM Treasury on a range of issues. This monitor the progress of all engagements with an issuer has committed to carbon neutrality in its 昀椀nancing involves taking part in annual consultations, forums and (regardless of where we hold it in the capital structure). portfolio by 2050 and in its own operations by 2030. investor roundtables. Our private credit assets are typically held for the long term It has also updated its policy to ban 昀椀nancing for new and often have very little secondary market liquidity. This coal power plants and expansion of existing facilities, makes pre-investment due diligence, ESG assessments, although with some speci昀椀c exceptions. Its strategy issuer engagement, and getting the right covenants in with targets to reduce exposure to high-impact sectors place absolutely critical. is now also published. Over the last year, we have continued to decline a number of deals in private credit due to governance concerns with an issuer, or we have restructured deals to provide an acceptable level of governance. See case study on page 32 as an example of how we have done this in practice over the year.