23 Pension Protection Fund Responsible Investment Report 2021/22 OUR APPROACH TO ENGAGEMENT CONTINUED Driving continual improvement from our managers Over the year, we saw signi昀椀cant progress in the ESG The momentum around Private Markets managers becoming We engage heavily with our external managers to processes and stewardship capabilities of our Alternatives PRI signatories has also continued over the year, and we have Taking action encourage ongoing improvements in their approaches to managers. In particular, a number of our US managers in seen a couple of our Real Estate managers sign up. managing ESG and climate-related risks and to ensure they private markets have established dedicated ESG or responsible Expansion of reporting templates from our managers continue to meet our high standards in this area. investment resourcing and reporting, which is a step up from More speci昀椀cally, we have seen impressive innovation from the function previously tending to fall under General Counsel. some of our Private Equity managers who were involved in We continue to push our external managers across the development of the SBTi Private Equity initiative. all asset classes to step up their regular reporting to us and encourage them to set best practice reporting standards for their markets. Over the year, we have Example of engaging with managers across an asset class: seen steady progress in their e昀昀orts to improve the How we work with our Real Estate managers • We encourage the adoption of green leases and • We use external tools such as GRESB and CRREM quality of both ESG and climate reporting to us, which • We assess Real Estate managers’ ability to measure, engagement with tenants and buildings occupants (Carbon Risk Real Estate Monitor) to measure and has led to much more fruitful conversations with our manage and report ESG and climate risks during the • We require annual reporting from managers with detail on benchmark the performance of real assets and assess managers about speci昀椀c material risks and potential selection and appointment process overall ESG credentials, stewardship and climate change the risk of stranded asset properties. impacts on investment theses. • We continuously monitor and encourage improvement risks, in alignment with the Task Force on Climate-related On occasions where we feel managers’ reporting is in our managers’ ability to manage climate risks and Financial Disclosures (TCFD) at both a fund level and for not su昀케ciently meeting our expectations, we will integrate ESG considerations into their frameworks individual assets make clear what our expectations are. This is not just communicated by our ESG team but also our internal portfolio managers who have appointed the manager. In extreme cases, we would look to escalate this via our Head of Investment Strategy or CIO, however we did not have to take this course of action during the last year. Assessing Liquids – We have a minimum threshold of mandatory ESG reporting for all of our Liquids managers. Acceptance of these minimum reporting requirements feeds directly into pass/fail funding decisions in advance of all new allocations and appointments. In practice, after successfully getting our Liquids managers to implement our basic quarterly ESG reporting templates last year, we’ve since concentrated on expanding the range of TCFD-related metrics on which they should now report. We provided 15 months’ notice of our request, in order to allow our managers su昀케cient time to source and onboard any new data requirements to meet this. Our Climate Change Report 2021/22 provides more detail on the new metrics requested. Assessing Alternatives – For alternative asset classes such as real estate and private equity, there is generally far less ESG data available. However, attention on ESG is growing within private markets and real estate asset classes, especially given their importance in the global transition to Net Zero. We have now started requiring our Alternatives managers to report some basic ESG data for their funds and demonstrate their grasp on ESG strategy and managing ESG risks among portfolio companies. As mentioned earlier, we have also been asking managers to join the ESG Outreach project, led by eFront, which should enable us to receive this reporting through our eFront platform within the next one to two years.