2021/22 | Responsible Investment Report

Responsible Investment Report 2021/22 How we invest responsibly to serve our members and levy payers

1 Pension Protection Fund Responsible Investment Report 2021/22 About the PPF: Protecting people’s How we are funded How we invest When an employer becomes insolvent and its pension We hold £39 billion in our investment portfolio scheme cannot a昀昀ord to pay the pensions promised, we (31 March 2022). This amount is managed in a broadly compensate scheme members for the pensions they have 50/50 split by internal and external investment teams. futures lost. We raise the money we need to pay PPF bene昀椀ts and We invest across public and private markets, seeking to the cost of running the PPF in four ways, shown in the capture both capital growth and reliable income generation chart below. to meet pension commitments. Our purpose is to protect the future of millions Split of funding sources of people throughout the UK who belong to Assets from pension schemes de昀椀ned bene昀椀t (DB) pension schemes. When 11.2% transferred to us The return we make the employers sponsoring these schemes fail on our investments we’re ready to help. The levy we charge on eligible pension schemes We do this by paying our members, investing 22.7% 42.1% Recovered assets we secure from sustainably and charging a levy. Our work has a insolvent employers real impact on people’s lives. So whatever we do, we strive to do it well, with integrity and members’ futures in mind. 24.0% The PPF in numbers as at 31 March 2022 9.7 million 5,220 294,847 £39 billion members of schemes we protect DB pension schemes protected PPF members* of assets under management * 187,039 members in payment and 107,808 deferred members with an average age of 66.

2 Pension Protection Fund Responsible Investment Report 2021/22 Contents 3 Message from our Chair 4 Key highlights of the year 5 T aking a holistic approach to sustainability Strengthening our 6 stewardship commitment Our progress at a glance 7 8 Our purpose and governance 15 O ur investment approach and incorporating ESG 18 Our approach to engagement 28 Escalation and exercising shareholder rights 33 O ur aspirations for the coming year 34 Appendices

3 Pension Protection Fund Responsible Investment Report 2021/22 Message from our Chair We are constantly adapting to a changing world. Continuing our commitment to transparency, we recently published our second Climate Change We have learned – and will continue to learn – a Report in line with guidance from the Task Force on Climate-related Financial Disclosures (TCFD). great deal on our journey, and have much to share, We see stewardship as essential to managing climate risks, and aim to encourage companies to deliver which may be of bene昀椀t to others. Our intention measurable outcomes and make use of market- leading tools to move towards a net zero pathway. is to share our insights transparently while also However, we don’t just focus on climate. The topics of human and labour rights, such as modern slavery learning from others in the industry. This report and Diversity & Inclusion (D&I), remain particularly important to us, along with Board structure and is a demonstration of that intention. remuneration. Over the past year, we continued to use our rights to exercise our voice, including escalation and voting against management in cases of unfruitful engagement. We will continue working in close collaboration with our asset managers and partners to implement our priorities in responsible investment. These include continuing to develop our stewardship practices in a way that we believe will reduce the thematic risks to which our investments are exposed – enabling us to help safeguard our members’ 昀椀nancial futures and a better future for all. Kate Jones Chair We have learned – and will continue to learn – a great deal on our journey, and have much to share, which may be of bene昀椀t to others.

4 Pension Protection Fund Responsible Investment Report 2021/22 Key highlights of the year Over the year, we continued to improve ESG risk disclosure across our portfolio, set new voting guidelines and aligned our policies and tools with more ambitious climate transition targets. Putting good Accepted by the FRC as a 2021 Managing and Updated climate policy and stewardship at the signatory to the UK Stewardship Code monitoring ESG tools to re昀氀ect scenarios based 1.5°C heart of what we do factors to safeguard on global action to limit global warming to 1.5oC our members’ 昀椀nancial futures Shortlisted for the inaugural Pensions Pushed all our external managers for Purpose Paris Aligned Awards for greater ESG risk disclosure, and 2021 for best Climate Governance stipulated more sophisticated analysis & Strategy statement on climate risks from managers of listed securities Encouraging our Contributed to the evolution of tools to Using our Votes cast on our behalf at company 2 investments to support Net Zero stewardship, including voice to deliver annual general meetings (AGMs) 54,053 the IIGCC Net Zero Stewardship Toolkit 2 contribute to a fairer, positive change Number of meetings voted at sustainable future Opposed management on at least one 4,923 Engaged with 196 companies on speci昀椀c resolution at 67 per cent of meetings 1 issues & objectives during the year 196 Close to 50% of our engagement Introduced new company voting objectives progressed by at least one guidelines on three key themes, and milestone during the year, across 45% consolidated more voting decisions 1 regions and themes to re昀氀ect our priorities Awards and recognition 2021/22 Professional Pensions Rising Star Awards 2021 Investments and Pensions Europe (IPE) Professional Pensions Women in Pensions Our Contact Centre won Team of the Year; Awards 2021 Awards 2021 Lauren Aitchison-Turner won the Excellence in We won European Pension Fund of the Year, Claire Curtin won Investment Manager of the Customer Service and Communication Award; Fixed Income Strategy and Long Term Year; Georgina Howes was Highly Commended Hannah Swallow was Highly Commended for Investment Strategy for the Rising Star Award the Excellence in Customer Service and Communication Award 1 For our segregated equities. 2 For our aggregated listed equities (across both segregated and pooled funds).

5 Pension Protection Fund Responsible Investment Report 2021/22 Taking a holistic approach to sustainability At the PPF, we are committed to This year we launched our new three-year Strategic Plan for 2022/25. One of our strategic priorities – demonstrating best practice in to ‘make a di昀昀erence’ – includes our aspirations to develop a holistic sustainability strategy, continuing sustainability across our organisation. to build on our established approach to responsible investment, and reducing our own environmental As climate change, social inequality and impact as an organisation. To support this strategy, we have formed a Senior corporate ethics receive unprecedented Leaders Sponsorship Group for non-executive and executive committee members to provide input global attention, it’s important that we and direction as our work progresses. We are also creating internal working groups to address speci昀椀c embed environmental, social and development and implementation initiatives. We will continue pushing ourselves to further the sustainability governance considerations not only of our investments, as well as managing our own operational impact – both directly and indirectly into our investment decisions, but through our suppliers where we can. across all our operations. We’ll push ourselves to further the sustainability of our investments, as well as managing our own operational impact. Oliver Morley Chief Executive

6 Pension Protection Fund Responsible Investment Report 2021/22 Strengthening our stewardship commitment Our Responsible Investment strategy Our new Stewardship Policy underlines this belief and commitment. Every day, we look to exercise our rights and puts ESG integration at its heart, re昀氀ecting engage with the issuers we invest in to make sure they‘re fully accountable to shareholders and other stakeholders. the fact that our investments can be Equally, we rigorously monitor the stewardship activities of the external fund managers we appoint – holding them to in昀氀uenced by environmental and social the same standards we hold ourselves. Re昀氀ecting this commitment, we were delighted to be factors to make a real di昀昀erence. We view accepted by the Financial Reporting Council in March 2022 as a signatory to the UK Stewardship Code 2020. The UK stewardship as one of the most powerful Stewardship Code sets high standards for those investing money on behalf of UK savers and pensioners, and those ways we can drive companies to transform, that support them. We are committed to striving to meet generating real world impact. its principles in all our activities. Escalating our engagement through voting is a critical element of our stewardship activities. We drafted new voting guidelines during the year to inform our voting Every day, we look to decisions in the upcoming AGM seasons. The guidelines summarise situations where we will consider voting against exercise our rights and management on key issues relating to climate change, modern slavery and D&I, re昀氀ecting our own focus areas engage with the issuers as an organisation. we invest in to make sure During the year, we decided to further consolidate our they‘re fully accountable voting processes across our di昀昀erent equity mandates by bringing more under the remit of our stewardship services to shareholders and provider EOS. We hope this will give us better oversight and consistency across our voting decisions, allowing for other stakeholders. greater alignment with our stewardship priorities. Barry Kenneth Chief Investment O昀케cer

7 Pension Protection Fund Responsible Investment Report 2021/22 Our progress at a glance How we advanced our plans in 2021/22 Stewardship Climate change Reporting Identifying opportunities We said we would… So we… We said we would… So we… We said we would… So we… We said we would… So we… Implement bespoke - Introduced new Conduct a - Carried out a Net Zero Continue to develop - Further improved our Explore - Invested in a pioneering voting policies for company voting climate alignment alignment project our analysis and access to underlying opportunities urban resilience fund to key themes guidelines for climate assessment across our complete understanding of ESG data via our for investment in support cities in delivering change, modern slavery of our entire portfolio to assess our ESG risks portfolio management sustainable assets critical resilience and D&I portfolio alignment with the systems, especially for within forestry infrastructure projects Paris Agreement and private markets See page 11 identify highest priority and infrastructure - Grew our investments Actively support - Actively participated engagement targets See page 16 in forestry by 20 per in a working group for cent and participated stewardship See page 27 Seek continued - Started requiring in the seeding of a new initiatives and peer the newly launched improvement in regular ESG and a昀昀orestation fund collaboration to IIGCC Net Zero Act to reduce - Transitioned to our transparency and climate data from our during the year drive long-lasting Stewardship Toolkit exposure new equity benchmark reporting across Alternatives managers to climate to drive a signi昀椀cant change in our See page 26 reduction in the our mandates See page 23 focus areas risks across carbon exposure of - Continued our our portfolios our equity mandates - Expanded the range of participation in the TCFD-related metrics PRI’s collaboration 1 See page 10 on which our Liquids on Modern Slavery managers report to us compliance in UK listed companies See page 23 See page 26 - Improved the transparency on - Helped to develop a our managers’ cross-body industry- voting activities standard TCFD template for listed equities for managers to report carbon emissions See page 28 See page 26 1 ‘Liquids’ refers to Global Credit, Public Equity, Absolute Return, Emerging Market Debt and Strategic Cash. All of these, apart from Strategic Cash, are managed externally.

8 Pension Protection Fund Responsible Investment Report 2021/22 Our purpose and governance What we stand for How our purpose and values feed Our purpose is to deliver the best 昀椀nancial results for into e昀昀ective stewardship Our approach to Responsible Investment (RI) our members. We believe this goes hand in hand with and stewardship responsible investing for two main reasons: Our organisation’s values At the PPF, we lead by example and demonstrate our values Our RI Framework puts our core beliefs into practice: from the top down. We believe that establishing the right 1. 2. values, culture and accountability is key to delivering the best outcomes for our stakeholders. RI Framework Good corporate Exercising our Our ‘ICARE’ values de昀椀ne how we conduct business across governance and ownership rights is not the organisation. They are integrated into every employee’s Strategic management of only a key part of being performance development review and annual goals, as well Governance & direction & Risk Metrics & ESG risks is a strong a responsible owner but as at a directorate and overall organisation level. accountability policy management transparency indicator of how an also helps safeguard organisation manages sustainable returns in risk as a whole. the long term. Taking action Priorities Culture is considered to be a key enterprise risk so our Executive Committee is now actively tracking a KPI on culture on a regular basis that re昀氀ects the Climate change Stewardship Reporting Our RI Framework puts these core beliefs into practice. FCA’s culture measurements of purpose, governance, leadership and people policies. An indicator measuring Read about our responsible investment (RI) strategy and our performance for responsible investment and our RI Framework to learn more about our beliefs, aims active stewardship is a key component of the purpose Climate & sustainability Engaging with fund Internal ESG Dashboards and approach to being a responsible investor. element. This aims to ensure that our beliefs and policies & strategies managers culture are continually enabling e昀昀ective stewardship. Climate stewardship Engaging with Investment Committee & issuers Board reporting Climate risk assessments & Voting of shares External RI reporting sustainability reporting Good corporate governance and management of ESG risks Climate Collaborative opportunities engagement & External Climate reporting is a strong indicator of how public policy an organisation manages risk as a whole.

9 Pension Protection Fund Responsible Investment Report 2021/22 OUR PURPOSE AND GOVERNANCE CONTINUED Whenever we make investment decisions and consider our investment strategy, we also apply these values. The table below shows how we translate these 昀椀ve values into performing our duty as a responsible investor. Our values Our investment approach Integrity We consider all material Doing the right thing ESG risks when we assess investment opportunities Collaboration We work collaboratively with Working as one peer organisations and partners Accountability We enact our shareholder rights Owning our and push our fund managers to actions and their deliver best practice on ESG risk outcomes management and transparency Respect We encourage our fund managers Valuing every voice and other stakeholders to deepen Diversity and Inclusion practices Excellence We’re never complacent – Being our best we strive to grow our RI practices and set new standards

10 Pension Protection Fund Responsible Investment Report 2021/22 OUR PURPOSE AND GOVERNANCE CONTINUED Our governance structure and activities Strong governance, with clear oversight, responsibility and accountability, is key to delivering on our RI strategy as well as our overall long-term investment objectives. Teams at every level of our governance structure have been highly active this year in helping to advance greater transparency on the sustainability of our portfolio investments, strong stewardship across our assets, and productive engagement with the companies and issuers we invest in. Function Roles & responsibilities Taking action: RI activities in 2021/22 PPF Board Highest governing body with Approved our new voting Discussed in detail the RI Undertook training to expand More training scheduled oversight for responsible investing guidelines in March 2022 activities and progress taking the Board’s knowledge of in 2022/23 around our (RI) and stewardship activities (see Appendix E) place throughout the year, climate change risks and how sustainability strategy (including climate-related) including outcomes from the these can be monitored and transition to a new lower-carbon managed through engagement equity benchmark and the Paris and voting Portfolio Alignment Project Investment Responsible for developing and Approved the update to our Reviewed the RI report ahead Our RI and climate-related Undertook the triennial review Committee maintaining the PPF’s RI and Climate Change Policy in of submission to the FRC, and activities and progress were of our Manager Selection stewardship principles and policies December 2021 (see page 11); reviewed the TCFD report reported on and discussed at Framework, including approving (including climate-related) reviewed and approved our four IC meetings during the our recommendation to carve Stewardship Policy and the year, ensuring the committee out a more explicit ESG score new voting guidelines in had regular oversight on March 2022 implementation of our policies Investment team Led by the CIO, responsible ESG reviews of the portfolio ESG and climate assessments A number of teach-ins held with In-house portfolio managers PPF shortlisted in November for ensuring adherence to the discussed with our CIO and continued to be formal in-house portfolio managers, given access to more ESG and 2021 for the Pensions for RI Framework, stewardship Head of Investment Strategy components of all investment including dedicated workshops climate-related resources from Purpose Paris Aligned Award for principles and associated policies through monthly dashboards due diligence and manager on the Paris Portfolio Alignment external providers through our the Best Climate Governance across all asset classes whether monitoring processes Project for each desk investment risk systems and Strategy Statement internally or externally managed ESG team Part of the Investment Developed our new voting Provided updates in the daily Saw our dedicated ESG Reviewed all managers Our Head of ESG was one of team, helping to oversee guidelines during the year Investment team meetings resourcing expand with the and stewardship provider the 昀椀rst participants to sit the implementation of the RI on ESG issues and trends addition of an ESG data analyst at least annually CFA’s pilot of its new Certi昀椀cate Framework, monitor investments throughout the year to help streamline and improve in Climate and Investing for ESG risks and opportunities, e昀케ciencies within our ESG quali昀椀cation and was awarded engage with portfolio managers, data management the certi昀椀cate in early 2022 external managers and our stewardship services provider Asset Managers Follows the PPF’s RI Framework Asset Managers Stewardship Services Provider* and Stewardship and stewardship policy, Having rolled out our quarterly To improve disclosure from We further consolidated our For pooled equity funds, we Services Provider* undertakes ESG integration and ESG reporting templates our Alternatives managers, voting processes by bringing have a split voting set-up issuer engagement then reports for Liquids managers last we encouraged a number more under the remit of EOS, that allows us to override on * EOS at Federated Hermes. transparently and accordingly year, these managers are of managers to join the giving us better oversight of signi昀椀cant votes which we now required to report on ESG Data Outreach project our voting decisions have used during the year an expanded range of TCFD initiated by eFront (see more metrics for portfolios on page 21)

11 Pension Protection Fund Responsible Investment Report 2021/22 OUR PURPOSE AND GOVERNANCE CONTINUED Key governance actions this year The aim of our guidelines is not to duplicate the EOS global voting guidelines, but rather to provide stakeholders with a 1. Reviewing our principles and policies concise document outlining areas of focus on issues that Our Board has committed that the Investment Committee are material to us. On matters related to good governance will review our Statement of Investment Principles (SIP) and such as board independence, competent leadership, and all responsible investment policies annually to ensure they separation of the governance roles, we primarily look to stay relevant and ambitious. leverage the deep expertise and recommendations of EOS. During the year, the Investment Committee reviewed our 3. Reporting on RI and stewardship to our committees SIP, our Climate Change Policy, our Stewardship Policy and Keeping every level of our governance structure informed our Exclusion Policy. The committee also approved our new of, and able to feed back on, our RI and stewardship voting guidelines. All policies are available on our website. activities is essential to monitoring our progress. This ensures we remain aligned with agreed actions and 2. Setting our 2022 voting guidelines principles and can spot any challenges or con昀氀icts of During the year under review, our Investment Committee interest at an early stage. approved the new PPF voting guidelines, which provide Every quarter, our Investment Committee Report provides clarity on our intentions for voting decisions during the the committee with a review of our RI policies, processes annual general meeting (AGM) season around a few core and policy review schedule. It also gives updates on stewardship issues. Developed by our ESG team, the stewardship, manager appointments and monitoring, guidelines leveraged best practice, as demonstrated by as well as key quantitative metrics such as ESG scores our stewardship services provider EOS and closely align and carbon intensity by asset class. with its global voting guidelines. Our key themes for 2022 have been guided by our own We provide monthly updates on the management of our organisational priorities. They include: management of climate-related and other ESG risks to our CIO and the climate-related risks, modern slavery, board diversity Head of Investment Strategy. We also highlight portfolio- in terms of gender and ethnicity, and executive relevant information or events as they arise in our daily committee diversity. investment meetings. Keeping every level of our governance structure informed of our RI and stewardship activities is essential to monitoring our progress.

12 Pension Protection Fund Responsible Investment Report 2021/22 OUR PURPOSE AND GOVERNANCE CONTINUED Developing our people Our commitment to industry-leading diversity Resources and training We’re actively building a diverse and inclusive workplace, During the year, we have focused on continual Today, 79 per cent of employees agree with the statement Next steps: development and training across the entire Investment where everyone can feel able to be themselves and is that, ‘the culture at the PPF allows people like me to be Our ambition is to increase ethnic minority representation team on ESG matters and stewardship activities. valued for their di昀昀erences. myself’ and 86 per cent agree that we actively encourage at all levels of our organisation. As we shared in our Within the ESG team speci昀椀cally, we have hired an Over the past three years, we’ve done a lot of work to make diversity in all its aspects, with strong agreement in certain Diversity Pay Gap report, we also have speci昀椀c targets to ESG data analyst to improve our e昀케ciency of collecting, our structural processes more inclusive. For example: under-represented groups. We’re con昀椀dent that we’re doing increase the number of black people who we hire as new assimilating and reporting on ESG and stewardship. a lot to support and increase diversity, but we’re aware that joiners and in senior roles, to re昀氀ect the ethnic diversity of More recently, we have also created a full-time dedicated • Rather than assume our recruitment processes aren’t this work takes time to come to fruition, particularly as we Croydon where we’re headquartered. Stewardship Manager role as we recognise the need for disadvantageous to anyone, we’ve thoroughly reviewed have low levels of sta昀昀 turnover. a senior person with specialist experience to lead our them to check for and prevent any inadvertent barriers While we’ve increased ethnic minority representation strategy and activities in this area. and bias at Board and Executive Committee level, our overall low sta昀昀 turnover hasn’t allowed us to drive change as fast However, we continue also to work with an external • We’ve continued to nurture, develop and promote 86% as we would like. To address this, we continue to run specialist stewardship services provider with its own internal talent, investing in future leaders, specialist apprenticeship programmes, build our talent pipeline extensive, diverse and experienced stewardship training and 昀氀exible working and nurture, develop and promote people internally. • We aim for all groups, regardless of background, to be of PPF employees agree the organisation team. We regularly assess whether this provider actively encourages diversity (EOS) and our external fund managers have the right fully represented at all levels of our organisation. expertise, policies, research and resources to carry out day-to-day stewardship activities on our behalf. See page 17 for more detail on how we thoroughly review our stewardship services provider and our fund managers’ capabilities within our appointment and monitoring processes. Training sessions and teach-ins for the Investment team have been provided on an ongoing basis. Our Talent & Development department is fully supportive of our investment sta昀昀 sitting ESG-speci昀椀c certi昀椀cations including the CFA Certi昀椀cate in ESG Investing and the recently-launched CFA Certi昀椀cate in Climate and Investing. Our Head of ESG participated in and passed the pilot exam for the latter quali昀椀cation in early 2022. Our Board and Executive Committee received dedicated training in autumn 2021 to expand their knowledge of climate change risks and how these can be monitored and managed through engagement and voting. Performance incentivisation We set performance incentivisation for both employees and external agents. For all our sta昀昀, performance is measured against a balanced scorecard of objectives covering business-as-usual activities, initiatives, and behaviours, the latter of which accounts for a speci昀椀c percentage of an employee’s annual performance assessment. This includes a review of an employee’s performance with reference to their core behaviours across our ICARE values (see page 8). We also have an investment directorate balanced scorecard with speci昀椀c RI and stewardship KPIs that the Investment team is measured on, as well as the culture assessment mentioned earlier on page 8.

13 Pension Protection Fund Responsible Investment Report 2021/22 OUR PURPOSE AND GOVERNANCE CONTINUED If there is a con昀氀ict of interest when it comes to speci昀椀c Reviewing our processes and Taking action decisions, we include provisions for declaring interests at assessing their e昀昀ectiveness Board and committee meetings. Our stewardship programme is subject to internal and Improving our process on split votes In practice, we approached our internal Levy teams to external review, and is overseen by the Investment During the year, our robust review process meant we inform them of our participation in the PRI’s FTSE 350 Committee. Policies, approaches and outcomes are became aware of certain high-pro昀椀le shareholder modern slavery initiative in advance of engaging with presented quarterly to the committee with action points votes in which the vote direction of our external the companies. We did this as we were aware that some recorded. Regulatory developments are monitored to investment managers di昀昀ered from one another. of the companies in question were levy payers. ensure that emerging themes and potential regulatory We have since established a process to identify and expectations are evaluated. Externally, we participate in evaluate signi昀椀cant votes internally and then ensure Externally-managed assets the PRI’s annual transparency reporting and assessment that our desired vote direction is implemented Regarding stewardship of assets managed externally process, which provides external validation on our RI consistently across each of our external investment on our behalf, we expect our external agents to identify and stewardship processes. We also confer with our managers and our stewardship services provider, EOS. and manage any con昀氀icts of interest in accordance peers and industry stakeholders on a regular basis and We do not expect this process to fully eradicate with Principle 3 of the FRC’s UK Stewardship Code 2020, share our practices through these forums. situations in which our votes are split, although a putting the best interests of clients and bene昀椀ciaries 昀椀rst. signi昀椀cant reduction in these instances is expected. Con昀氀icts of interest policies are reviewed as part of our Currently, the PPF Internal Assurance team does not appointment of any fund manager through our operational explicitly review the work undertaken by the ESG team. due diligence (ODD) assessments. Our expectations are However, in relation to external manager selection, explicitly referenced within our investment management pre-investment sign-o昀昀 must be provided by the ESG agreements and side letters (see Appendix D and G for team and this is then reviewed by the Operational Due Managing con昀氀icts of interest example terms, including 1.4 and 1.8.4). This includes a Diligence team and the Asset & Liability Committee requirement for our managers to attest that they have before any investment can be approved. Con昀氀icts of Interest policy adhered to our policies and expectations on a quarterly basis. The ESG team undertakes an annual review of EOS’s The PPF has a Con昀氀icts of Interests Policy (see Appendix C) Con昀氀icts are also considered by our stewardship services services, as the principal external stewardship services to identify where a con昀氀ict of interest may arise and how provider EOS when undertaking voting and engagement provider. A summary of this review is then provided to con昀氀icts should be monitored and managed. We’re committed on our behalf. Although we reserve the right to amend the Investment Committee. We are currently reviewing to conducting business and our investment activities in the any votes proposed by our agent, and to this end review the need for a structured internal audit or external best interests of our bene昀椀ciaries, and have comprehensive voting proposals ahead of AGMs, we are satis昀椀ed that assurance of the ESG and stewardship activities and an controls across the organisation to prevent con昀氀icts of interest our voting and engagement agent has suitable expertise, update will be provided in the next reporting round. from a昀昀ecting them. We place individual accountability high policies, research and resources to carry out stewardship up on our cultural agenda, and it is one of our core values. All activities on a day-to-day basis on our behalf. Therefore, This Responsible Investment Report has been reasonable steps must be taken to prevent potential or actual where con昀氀icts of interest arise, we adopt an arm’s length approved on behalf of the Board by the Chair of the con昀氀icts of interest, or situations that might be perceived as approach and aim not to in昀氀uence or override the voting Board and signed by the CEO following review by giving rise to a con昀氀ict of interest. Under the policy, our sta昀昀 decision of our agent. members of the Board and Executive Committee. It are required to disclose any interest in any company, or other is informed by ongoing reporting throughout the entity, in which the PPF has an ownership interest. EOS takes steps to avoid con昀氀icts of interest between year to the Board, Investment Committee, Asset and Recording con昀氀icts us and any other clients, and between us and EOS or its Liability Committee and monthly updates to the Chief a昀케liates, and comply with our Con昀氀icts of Interest Policy. Investment O昀케cer and Head of Investment Strategy. Details of con昀氀icts and noti昀椀cations are recorded in the EOS noti昀椀es us without undue delay of any con昀氀ict of Con昀氀icts Register which is maintained by the Compliance interest or potential con昀氀ict of interest of which it becomes and Ethics team. We also have other related policies such aware or to which it may be subject and the implications as a Code of Conduct & Conduct Rules Policy (for both of such con昀氀ict of interests for the Board. Read more about employees and our suppliers), a Handling Non-Public how EOS approaches con昀氀icts of interest here. We place individual accountability Information Policy and a Personal Account Dealing Policy. In practice, over the year EOS has provided transparency of high up on our cultural agenda, Our non-executive Board members may hold other director potential con昀氀icts of interest in their communications to us positions, or have connections with external fund managers. relating to their voting recommendations for a company and it is one of our core values. We share all Board members’ outside interests on our website, that might be one of their clients (or a昀케liated with a client and update any Board expenses quarterly on the website. of EOS or Federated Hermes).

14 Pension Protection Fund Responsible Investment Report 2021/22 OUR PURPOSE AND GOVERNANCE CONTINUED Stakeholder engagement More broadly, we actively seek our members’ and Capturing levy payer feedback Implementing the SM&CR regime stakeholders’ views and feedback by a number of We know that schemes don’t choose to use our service, Publishing and implementing our version of the FCA’s Senior Keeping our stakeholders updated methods, including quantitative surveys, consultations, but this reinforces our ambition to listen carefully to what Managers and Certi昀椀cation Regime is one key way we hold We’re committed to regular reporting and transparency focus groups, one-to-one interviews and our Member levy payers want, understand where we can do better, and ourselves to a high standard across all that we do. This is the so that our members and other stakeholders such as levy Forum. We know that our stakeholders expect us to invest then take action. In addition to our annual consultation system that regulated 昀椀nancial organisations use to de昀椀ne payers can be aware of our progress and activities in all areas, responsibly and we believe we have a duty to set the on our levy approach, over the past three years we’ve their managerial responsibilities and encourage sta昀昀 at all including stewardship. We regularly update our website highest standards of practice. introduced biannual structured SME Forums, along with levels to take personal responsibility for their actions. with our latest voting and engagement activities and our ongoing informal meetings, surveys, focus groups and responses to industry and government consultations. Assessing receptiveness to our RI approach email newsletters to gather feedback and share information. We 昀椀rst published our version of the SM&CR in 2019 and it’s These communication channels have been very valuable. now become an integral part of our organisation and how We publish annual RI reports, and provide ESG and Our latest review of the views and feedback received we conduct ourselves. It has helped shine a light on exactly sustainability disclosure in our annual report and accounts. during our annual PPF Opinion Formers research who and what senior managers are accountable to and for, We’ve also published our second dedicated Climate Change assessed their receptiveness to the PPF’s approach so it’s easy to 昀椀nd that information and work e昀昀ectively on Report this year in line with Task Force on Climate-related regarding ESG and diversity & inclusion. We also asked processes across the organisation. Financial Disclosures (TCFD) requirements. Our Head of ESG about their familiarity with our various sustainability 96% frequently speaks at industry conferences and events. reports, including our RI reports. We are considering One of the functions is ESG, where our CIO has overall the 昀椀ndings from this in the context of our overall Average levy payer satisfaction responsibility for ensuring the implementation of our ESG sustainability communications strategy and exploring strategy (with stewardship a key priority of this) within how to further improve the usefulness of our reporting Our levy payers sponsor a total of 5,220 schemes, our investments. SM&CR, and our adoption of it, has to our stakeholders. comprising 9.7 million members. We’re pleased to helped to clarify and enhance personal accountability and have exceeded our target of 80 per cent customer responsibility and underlined the importance of a clear satisfaction this year, with over 96 per cent of levy and e昀昀ective governance structure. We expect all sta昀昀 payers feeling satis昀椀ed with the combined customer to perform their activities in line with the standards we services o昀昀ered by the PPF and our insolvency risk stipulate. As detailed on page 8, our ICARE values set the scores provider Dun & Bradstreet (D&B). foundation for how our sta昀昀 behave and adhere to the conduct rules. Engaging our employees The PPF has a unique role spanning both public and private sectors. This gives us a culture and working environment We have a strong and clear that our people are proud to be a part of. Our sta昀昀 sense of purpose, which is consistently say they would recommend working here to family and friends and, despite the phenomenon of the attracting people who are ‘Great Resignation’ following the Covid-19 pandemic, our employee turnover to date has remained low. motivated to make an impact 98% in the world. Following an external review in 2021/22 of our SM&CR of our people feel we make a approach, we’re pleased to have received a very positive positive di昀昀erence report on our progress. The reviewers were satis昀椀ed that We have a strong and clear sense of purpose, which we’re implementing the regime in a way that’s reasonable is attracting people who are motivated to make an and proportionate, and that our senior managers are impact in the world. Ninety-eight per cent of our overseeing their responsibilities appropriately. people feel we make a positive di昀昀erence and 88 per cent say they and their teams regularly discuss how to improve our service and performance.

15 Pension Protection Fund Responsible Investment Report 2021/22 Our investment approach and incorporating ESG Our investment objectives How the fund is managed Asset allocation of the PPF portfolio Regional breakdown of the PPF portfolio The PPF portfolio is currently managed to achieve two We manage around half of our assets in-house through a Equity 10.4% UK 62.4% long-term objectives: team of portfolio managers across UK LDI hedging strategies, Global Credit 2.5% North America 14.6% 1 hybrid assets and strategic cash. The remaining 50 per EMD 4.2% Europe ex-UK 10.0% • Grow assets at cash + 1.5 per cent annualised over the cent is managed by external fund managers across a range Absolute Return 5.8% long term of vehicles, including segregated accounts, pooled funds, Asia Paci昀椀c 3.4% • Allocate a risk budget to assets in our investment closed-end funds, co-investments and passive instruments. Cash 6.4% Middle East Africa 1.7% universe as e昀케ciently as possible, while ensuring that Alt Credit 5.0% Asia Emerging 2.2% the interest-rate and in昀氀ation risks within our liabilities We have a highly diversi昀椀ed portfolio of ‘growth’ assets that Private Equity 4.0% Latin America 1.0% are fully hedged through our Liability Driven Investment are expected to deliver returns in excess of the risk-free Infrastructure 3.0% Europe Emerging 0.8% (LDI) strategy. rate of return. As well as investing in public market assets, we take advantage of the long-term nature of the fund by Property 5.8% Others 4.0% The Board sets a risk budget for the Investment team accessing illiquidity premia through private markets. We Farmland & Timber 2.1% which drives the process for determining our strategic take a considered approach when implementing exposures UK Credit 11.8% asset allocation. The non-LDI (growth) part of our portfolio to asset classes, some of which are non-traditional, to Gilts 38.9% is a diversi昀椀ed portfolio of public and private assets with ensure that we optimise our risk budget. allocations that are optimised against the risk budget. This Geographically, a signi昀椀cant portion of the portfolio is approach is taken to ensure that we can pay cash昀氀ows to invested in UK assets (over 60 per cent), which is largely our members as they fall due. driven by our internally-managed UK LDI, hedging and cash assets. The next largest regional allocations are to North America and Europe ex-UK. We manage around half of Measuring our performance our assets in-house through We measure the performance of our investment portfolio a team of portfolio managers. over 昀椀ve-year rolling targets, which we consider to be an appropriate investment time horizon to deliver the The remaining 50 per cent is cash昀氀ows required to our members. This long-term perspective aligns well with our stewardship expectations, managed by external fund as we recognise that engagements with companies and managers across a range other issuers can take a number of years to bear fruit. of vehicles. Considering the needs of bene昀椀ciaries in our stewardship process and activities As mentioned, we have built our responsible investment and stewardship processes to safeguard sustainable returns in the long term, in line with the long-term nature of our liabilities and our investment horizon. We also consider other stakeholders such as our levy payers, when striving to generate these returns in a sustainable manner, and consult with our levy payers on an ongoing basis regarding our funding strategy. 1 Investments which possess attributes of both liability hedging and growth assets.

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

17 Pension Protection Fund Responsible Investment Report 2021/22 OUR INVESTMENT APPROACH AND INCORPORATING ESG CONTINUED Ensuring our external agents are Oversight of our external investment managers CASE STUDY aligned with our approach Generally speaking, we expect our fund managers Embedding social value into our External agents such as third-party investment managers to focus on the next link in the investment chain and a specialist stewardship services provider are critical to (i.e. which underlying companies or fund managers procurement process helping us manage our investment portfolio e昀케ciently and they are allocating to). responsibly. We continually monitor our agents’ practices in We are now trying to ensure alignment with our order to keep improving the quality and coverage of their We apply robust RI requirements that all our external principles beyond just our investments, with our stewardship activities and ensure consistency with our managers must meet prior to investment (and on an largest suppliers too. During the year we piloted an own investment beliefs, policies and guidelines. ongoing basis), to ensure we are all aligned. We will not approach to evaluating social value within our own appoint or allocate more capital to managers that fall procurement process. These pilots have achieved A holistic oversight of our external agents is carried out short of these standards. See page 22 for further detail positive outcomes, with bidders demonstrating across the Investment team, ESG team, Operational Due on our manager appointment process, including our actions they’re taking in areas including employee Diligence (ODD) team and the Commercial Services team, minimum requirements and examples of how we wellbeing, community engagement, social capital ensuring robust analysis in the selection process and have engaged with managers prior to funding. and the environment. throughout the life of the relationship. We require disclosure of all existing and potential For example, when the contract with our investment Oversight of our stewardship services provider managers’ policies, ESG integration and stewardship custodian was up for review, we took the opportunity We have chosen to outsource stewardship activities for processes and reporting to ensure they meet our to make social value an important part of the tender. our segregated listed issuers to EOS, part of Federated evolving expectations (see Appendix H). Regular Proposals were scored on metrics including suppliers’ Hermes, to ensure that our shares are voted cost-e昀케ciently stewardship reporting is already required from all carbon reduction plans and commitments to D&I. and companies are engaged with where ESG concerns managers of our public markets strategies, and the quality of this reporting feeds into our ongoing The evaluating panel assessed the practices and arise. Our 2020/21 RI Report provided more detail on our monitoring and ratings process. We are now asking commitments from the successful bidder, Northern selection process for these services. the managers of our private markets strategies to Trust, including their net-zero commitment, carbon We carry out oversight of EOS’s engagement services provide this reporting as well. reduction plan, commitment to ESG reporting to meet for both our segregated and direct investments. EOS also TCFD requirements, and D&I reporting. Although we’re provides voting recommendations to us for our segregated Our external managers are also reviewed by our in the early stages of this journey, we’re building a equities, in line with their published corporate governance dedicated ODD team on a scheduled review basis. clear picture of how our procurement practices can principles. However, we are always in control of the The ESG team works closely with the ODD team to impact society and the environment, and what actions vote and have the ability to exercise our voting rights ensure that ESG considerations are fed into the review we can take to reduce negative impacts. in segregated holdings in line with our own policy process. We screen for reputational risks associated and principles. with personnel and request updates on their 昀椀rm’s D&I metrics in our annual ODD questionnaire, which is sent to all managers. The ODD team also reviews managers’ policies in key areas such as ethics, business continuity, Taking action disaster recovery and money laundering. We monitor EOS’s activities through regular contact Assuring manager alignment with our principles We apply robust RI via email and calls, more formal quarterly client Our ESG review process (see Appendix H and F for requirements that all our meetings and have fed back to them extensively more detail) is an essential part of selecting, appointing on the usability of their client portal over the last and monitoring our managers to ensure that their external managers must meet. year. We also participate in their semi-annual client activities align with our principles. We continuously We will not appoint or allocate advisory council meetings. monitor our managers’ progress through regular reports on stewardship activities, ESG-related risks and climate- more capital to managers that This year we discussed the 昀椀ndings from our Paris related information. When we raise issues with speci昀椀c Portfolio Alignment Project (see page 27) to see how managers, we report this to our Investment Committee. fall short of these standards. we can incorporate some of our action points around Net Zero stewardship into their service, especially During the year, we recommended carving out a more in relation to engaging with emerging markets explicit ESG score in the RFP evaluation stage, to increase companies where there is still little disclosure on accountability and transparency. This was approved by these issues. We also discussed the votes around our Investment Committee. climate transition plans in more detail ahead of the AGM season and how best to hold companies to account against our expectations.

18 Pension Protection Fund Responsible Investment Report 2021/22 Our approach to engagement Engagement with issuers is a Asset class Owner of engagement Integration and stewardship approach fundamental pillar of our RI Primarily internally-managed assets strategy and the approach by Liability Driven Investment PPF We engage with borrowers, primarily during reissuance or re昀椀nancing. We have less in昀氀uence with which we believe we can e昀昀ect (LDI) sovereign debt, although we engage on market-level issues like LIBOR, RPI, and gilt issuance greatest change. We’ll always UK Public Credit & PPF We engage with borrowers, more so around reissuance or re昀椀nancing look to exhaust the engagement Strategic Cash EOS EOS also covers these portfolios for engagement services process before considering UK Private Credit PPF We engage with borrowers, more so around reissuance or re昀椀nancing divestment from a holding. External managers We engage with our external managers on their activities Primarily externally-managed assets How we engage Listed Equities EOS We re昀氀ect any concerns from our assessments in our voting and engagement approach We engage with issuers in a number of ways: directly, through our external External managers Managers can exert in昀氀uences on companies through voting and engaging with company management. agents, or through collaboration initiatives – when we consider it is in our Approaches will di昀昀er depending on whether managers follow high-in昀氀uence, systematic or active strategies bene昀椀ciaries’ long-term interests to do so. We expect boards of investee External manager monitoring. We also use intelligence from EOS’s engagements to inform our oversight companies to show responsibility, integrity, and independence. In cases of our managers’ activities where a company board deviates from principles of good practice, it should explain its reasons for so doing. Listed Credit: Corporate, External managers Managers can engage with borrowers, more so around reissuance or re昀椀nancing – less in昀氀uence with We prioritise engagement in themes of greatest importance to us. As part of sovereign, emerging sovereign debt this, we work closely with our stewardship services provider EOS to de昀椀ne markets (EM) We monitor external managers’ own engagement practices and activities focus areas and provide feedback on them. More detail on our engagement approach was provided in our 昀椀rst RI report and on our website. Absolute Return External managers Managers can engage, but with limited in昀氀uence in strategies with shorter holding periods However, there’s still a big need to boost transparency around engagement, We monitor external managers’ own engagement practices and activities especially in asset classes such as sovereign debt and private assets, both of which have great potential for positive impact. Over the past year, we’ve Real Estate External managers Managers with full control of assets can engage with tenants and local community continued to encourage improvements in these areas and supported our We monitor external managers’ own engagement practices and activities managers to engage with the entities in their portfolios. Private Equity and External managers Managers can engage with companies or assets in primary funds, or with operating companies in Infrastructure EOS infrastructure, especially if they have board seats. We monitor external managers’ own engagement We prioritise engagement in themes of practices and activities EOS engages on our listed infrastructure holdings greatest importance to us. As part of this, we work closely with our stewardship Alternative Credit External managers Managers can have ongoing dialogue with borrowers, but have limited control over management. We monitor external managers’ own engagement practices and activities services provider to de昀椀ne focus areas. Secondaries / External managers We monitor external managers’ own engagement practices and activities Fund of Funds

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.

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.

21 Pension Protection Fund Responsible Investment Report 2021/22 OUR APPROACH TO ENGAGEMENT CONTINUED How we engage with private markets and unlisted assets Private Equity engagement – Private Equity managers Real estate engagement – One of our Property managers Infrastructure engagement – We are invested in an Given the diverse nature of private markets, we take a have a key role to play in the energy transition, given their is responsible for the day-to-day management of our UK Infrastructure fund that has three core investments all focused nuanced approach to engagement within these asset ability to invest in and support businesses across the value Property portfolio. As part of this role, they are responsible within Europe. We are pleased to note positive progress classes. We have been working with our managers in chain. One of our Private Equity managers engaged with all for the sustainability pro昀椀le of the properties. An example from the manager in engaging with its portfolio companies this challenging space to increase their stewardship its holding companies to set a decarbonisation journey and of progress in the portfolio was the redevelopment of on sustainability across each of the businesses during the and engagement processes. We look to our appointed assist them in setting up sustainability KPIs and measuring industrial units in the North of England. Both units on the year under review. The manager provides standardised ESG managers to drive improvement in the companies and them. This is part of the manager’s overall commitment since site have been speci昀椀ed for high ESG standards with Energy performance tracking tables in its investor reporting along managers they invest in, and encourage them to provide 2020 to align their activities with a 1.5°C global warming Performance Certi昀椀cate (EPC) ratings of A and a ‘Very Good’ with commentary on progress. Two of the businesses have us with information on progress and demonstrate the scenario, which has since been validated by the Science rating from BREEAM (one of the world’s leading science- recently released sustainability reports providing signi昀椀cantly added value of more stringent sustainability practices. Based Targets initiative (SBTi). based suite of validation and certi昀椀cation systems for a more insight into how they operate. We will continue to review See case study on the ESG Outreach project below and Private Debt engagement – Our Private Debt managers sustainable built environment). The site is also equipped and engage the manager on the information provided and examples for each asset class. with EV charging. encourage further improvements where deemed necessary. are less likely to have signi昀椀cant control or leverage with Our interactions with general partners (GPs) and underlying issuers. However, we still expect them to engage As the underlying client, we continue to interact with Forestry engagement – We have been engaging extensively expectations of how they engage with portfolio where they do have access to management. One of our the manager on sustainability issues, particularly to avoid with our Forestry managers over the last year to increase companies will di昀昀er from our expectations of our Private Debt managers negotiated with a UK company ‘stranded asset’ situations due to any buildings not meeting their reporting to us on carbon sequestration, moving on secondary managers, and how they engage with during the year to establish ESG KPIs for the ratchet that minimum energy e昀케ciency standards. from reporting on certi昀椀cation. Whilst we have received this underlying GPs. In terms of control, we have greater enhances credit quality, including Quality and Regulatory from most of our managers now, the data collection and expectations around stewardship where GPs hold Inspection, Patient Satisfaction, Annual Sta昀昀 Training and methodologies are still at very early stages so aggregation board seats or controlling stakes in companies. Carbon Emission Data requests. The latter hasn’t been across di昀昀erent mandates is not yet possible. We hope to have established yet. more in our next report to share on carbon sequestration. Taking action Farmland assets engagement Encouraging sustainability in a leading Collaborating to improve ESG data in beef producer private markets We are part of an investment consortium with In late-2021, we joined the working group of the ESG board representation that owns one of the largest Data Outreach project led by alternative investment and oldest agricultural and beef producers in Australia. technology platform eFront (part of BlackRock) to This enables us to in昀氀uence its strategic approach and accelerate and simplify the collection, analysis and sustainability pro昀椀le. reporting of ESG data for private markets. The initiative aims to collect a range of ESG metrics on portfolio In 2021, its inaugural sustainability framework was companies from a broad base of private equity and published, greatly improving disclosure to stakeholders. credit managers to facilitate, expand, automate and In addition, the team completed the conversion of all commercialise ESG reporting for private markets. bores and electricity power sources to solar, signi昀椀cantly reducing its fossil fuel consumption. This conversion We joined in our capacity as a limited partner (LP) made good business sense but also has environmental both to encourage our general partners (GPs) in and employee safety bene昀椀ts. private markets to participate, and to get access to the collected data as soon as it is available. We anticipate that this initiative will go a long way to improving the process for data collection, especially among smaller private market managers that haven’t built out their own reporting functionality yet. The pilot stage has been running through 2021 and 2022. The aim is to open the product up to over 2,500 private market managers, reaching over 70,000 private companies.

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.

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.

24 Pension Protection Fund Responsible Investment Report 2021/22 OUR APPROACH TO ENGAGEMENT CONTINUED Engaging through our stewardship Engagement themes: EOS’s stewardship process to achieve long-term sustainable returns on investment services provider As explained above, we use an external stewardship services Governance foundation Governance processes provider, EOS, to engage and vote across our segregated Equity mandates plus also Public UK Credit and Cash assets. Investor protection Board e昀昀ectiveness Purpose, strategy Environmental outcomes Sustainable Our previous RI Reports and our Stewardship Policy detail and rights and ethical culture and policies Climate change action wealth creation how we work with EOS, its four-step engagement milestone Risk management process to drive change at companies and the full list of Natural resource stewardship themes considered. Executive remuneration Circular economy and zero pollution Latest activity and themes Corporate reporting EOS focuses its stewardship activities on the issues that it believes have greatest potential to deliver long-term sustainable wealth creation for investors and positive Social outcomes environmental and societal outcomes. Currently it is Wider societal impacts focused on six outcomes: environmentally, these are climate change action, natural resource stewardship, and Human capital circular economy & zero pollution. Societally, its focus is on wider societal impacts, human capital, and human & Human and labour rights labour rights. See the graphic to the right for more detail. Summary of the EOS engagement milestone process EOS focuses its stewardship 4. activities on the issues that it believes have greatest potential 3. The company implements a strategy to deliver long-term sustainable The company develops or measures to address wealth creation for investors and 2. a credible strategy to the concern The company achieve the objective, positive environmental and 1. acknowledges the or stretching targets societal outcomes. Our concern is raised issue as a serious are set to address with the company at investor concern, the concern the appropriate level worthy of a response Progress

25 Pension Protection Fund Responsible Investment Report 2021/22 OUR APPROACH TO ENGAGEMENT CONTINUED Our issuer engagement progress EOS had another strong year of delivering engagement Progress on the 361 objectives by theme during the year and outcomes objectives. During the year, at least one milestone moved up in the milestone scale for 163 of the outstanding objectives. Environmental 72 67 Progress and outcomes from EOS-overseen assets The chart shown on the right describes how much progress has been made in achieving the milestone set for each In 2021, EOS engaged with 196 companies on 1,540 ESG engagement theme. Social and Ethical 43 33 strategy, risk and communication issues and objectives. Its holistic approach to engagement means that it 60 objectives were marked as complete during the year and Governance 57 38 typically engages with companies on more than one 38 objectives progressed to the next milestone or above. 52 topic simultaneously. were new objectives established during the year. Strategy, Risk and 26 25 Communication Engagement by theme Of the 198 objectives without progress during the year, % Progress on A summary of the issues and objectives on which our 92 were discontinued and 106 remained at the same objectives engaged 55% 45% stewardship services provider EOS engaged with companies milestone stage. in 2021 is shown below. Without progress With progress Engagement in UK Public Credit and Strategic Cash books Engagement progress in 2021 Of the 196 companies engaged by EOS during the year, EOS carries out engagement through a four-step process. As 52 companies were held in our in-house UK Credit and Examples of EOS corporate engagement on our behalf during the year shown on the previous page, it begins with raising a concern Strategic Cash portfolios during the year and over 80 per which it follows up diligently until it achieves a measurable cent of these were acted upon speci昀椀cally during this Alibaba in China Alphabet in the US outcome. The process can span quarters or even years. time period. This year saw EOS speak with the head of investor During an ESG investor call with Alphabet this year, the We provide a couple of examples of company engagements relations and the newly appointed ESG expert at tech conglomerate’s Chief Diversity O昀케cer reported that in these portfolios on page 19. China’s tech and e-commerce giant Alibaba – the 昀椀rst the company is working to increase inclusion, meet targets time the company has disclosed anything meaningful of 30 per cent representation of underrepresented groups on ESG since 2018. Alibaba has made some positive in leadership roles and double the numbers of black EOS engaged with 196 companies on Issues and objectives commitments on climate change and EOS asked for employees at all other levels by 2025. While grati昀椀ed by our behalf in the following regions by theme more detail about its targets to be Net Zero for Scope the company’s increased focus on diversity & inclusion, 1 and 2 emissions by 2030 and deliver a 50 per cent EOS will continue to scrutinise for meaningful cultural reduction in Scope 3 emissions. The company con昀椀rmed change. It plans to keep engaging the company on a it would consider incorporating ESG incentives into range of issues, particularly digital rights. executive pay. EOS continues to push for more disclosure Developed Asia 40 on digital rights and a review of the company’s score and Progressing: Australia and 3 Environmental 326 performance on the Ranking Digital Rights benchmark. • Diversity & inclusion disclosure New Zealand Social and Ethical 375 Progressing: • Demonstration of more inclusive culture EM & 24 • Human rights and business model 196 Frontier Markets 1,540 Governance 507 • Science-based target setting Europe 34 Strategy, Risk and 332 • Customer data protection & privacy Communication North America 76 • Ethical AI use & governance principles United Kingdom 19 • ESG reporting

26 Pension Protection Fund Responsible Investment Report 2021/22 OUR APPROACH TO ENGAGEMENT CONTINUED Engaging with issuers through The PPF is a member of the following initiatives: Key industry collaborations during the year To support the campaign, we are currently encouraging investor collaboration • We’ve been a signatory to the United Nations-supported Climate Action 100+ – The Pension Protection Fund over 700 non-disclosing companies in our listed portfolios Principles for Responsible Investment (PRI) since is a signatory to Climate Action 100+, the largest-ever to respond to CDP, either by us leading engagement or Acting collaboratively with other investors to address 2007; our Head of ESG sits on the PRI’s Infrastructure investor engagement initiative on climate change. Involving supporting it. We will assess the progress made on the industry, regulatory or company-speci昀椀c issues has become Advisory Committee and we’re members of its around 700 investors in 33 markets who collectively hold campaign once the annual reporting period closes and a core pillar of our stewardship approach, given the scale, Collaboration platform. half of the world’s assets under management, it aims results are published at the end of 2022. in昀氀uence and e昀케ciency it can deliver. As part of our e昀昀orts • The Occupational Pensions Stewardship Council to put pressure on the world’s largest emitters, which Addressing ESG risks in intensive farming – During the to maximise the collective voice of the investment industry, (OPSC) was created by the UK’s Department for Work are responsible for approximately 80 per cent of global year we became a member of the FAIRR Initiative. This is we are members of initiatives and engagements around & Pensions to promote and facilitate high standards of industrial emissions. Largely as a result of Climate Action a collaborative investor network that raises awareness of a number of themes that are important to us. Given there stewardship of pensions assets. The council provides UK 100+, 52 per cent of targeted companies have made Net the ESG risks and opportunities brought about by intensive are so many industry initiatives to address environmental pension schemes with a forum for sharing experience, Zero commitments and 72 per cent now report in line livestock production. and social challenges, we prioritise support for projects best practice and research, and providing practical with TCFD recommendations. The majority of these in markets where we’re already active or where we can support, which we have found very useful. It also enables companies feature in our passive portfolio. There is extensive evidence that ESG issues can signi昀椀cantly see rules are being developed to improve a market’s opportunities for schemes to collaborate on stewardship PRI Votes on Slavery – We were a member of the 2021 impact the 昀椀nancial performance of companies involved functionality and reduce systemic risks. We discuss this activities such as shareholder resolutions, climate change Votes on Slavery collaboration initiative run by the PRI in industrialised animal agriculture. The success of these more on page 27. and corporate governance. during the year. This initiative achieved close to a 100 per companies is, therefore, contingent upon longer-term • As an investor member of the Institutional Investors cent success rate in encouraging compliance with the s54 environmental, social and regulatory trends, and the ability Group on Climate Change (IIGCC), we’ve been an active reporting requirements of the UK Modern Slavery Act for for companies to successfully anticipate and navigate member of its Net Zero Stewardship Toolkit group since FTSE 350 companies. Only two companies, out of the 61 we these changes. We expect to be involved in future investor Acting collaboratively with last year (see case study below). We also participate in its engaged with, remained non-compliant by December 2021. collaborations by the group. other investors to address collective responses to consultations. As a result of its success, the UK Home O昀케ce asked that • We encourage greater disclosure of environmental the initiative continue to pressure FTSE 350 companies in industry, regulatory or impact by companies, governments and other institutions 2022. We will continue to support this campaign as modern company-speci昀椀c issues has by supporting organisations such as the global disclosure slavery is a key theme in our 2022 voting guidelines. systems provider CDP. (See CDP Non Disclosure Investor expectations letter on Net Zero aligned audits become a core pillar of our Campaign below.) –EOS co-signed a letter to the French entities of Deloitte, stewardship approach. • The Emerging Markets Investors Alliance (EMIA) enables EY, KPMG, and PwC following the publication of an analysis institutional emerging market investors to support good of carbon-intensive companies’ 2020 昀椀nancial statements governance, promote sustainable development, and by Carbon Tracker. This showed that the auditing of French improve investment performance in the governments companies lagged behind other countries and did not meet For example, on climate change, we actively participate in and companies in which they invest. Our Head of ESG investor expectations for audit 昀椀rms or directors on Net the programmes run by the Institutional Investors Group is involved in the Asset Owner Advisory Council for Zero accounting, as set out in a paper published in 2020. on Climate Change (IIGCC) and have contributed to key the alliance. Indeed, no audits provided the visibility EOS sought on the projects focused on Net Zero frameworks and physical risks. • We have been closely involved in the development of a potential 昀椀nancial implications of a 1.5°C transition pathway, We also work closely with UK policymakers and market Carbon Emissions Template through the Investment which global leaders have committed to deliver. The letter stakeholders, such as the Pensions and Lifetime Savings Association, the Association of British Insurers and the requested that the companies act immediately to ensure Association, the UK Debt Management O昀케ce and the Pensions and Lifetime Savings Association to help fund investor expectations are met in compliance with existing Department for Work & Pensions. We are involved with a managers calculate and report their carbon emissions regulations and standards. range of investor organisations to help drive industrial and to asset owners using a standardised data template. Collaborations for the coming year legislative change to encourage higher levels of stewardship We actively shared our own extensive work with our and greater disclosure of ESG risks across the investment managers to establish our quarterly ESG reporting CDP Non-Disclosure Campaign – CDP is a global not- industry or within speci昀椀c sectors. templates. Our latest Climate Change report refers for-pro昀椀t that helps companies and cities disclose their to this in more detail. environmental impact. The CDP Non-Disclosure Campaign aims to persuade non-responsive companies to take action and respond to its questionnaires, depending on which of CDP’s three focus areas (climate change, water security and deforestation) are material to their business activities or supply chains.

27 Pension Protection Fund Responsible Investment Report 2021/22 OUR APPROACH TO ENGAGEMENT CONTINUED We believed there was a high likelihood that this would Our policy engagement through EOS Taking action subsequently be proposed by the DWP (which did indeed SASB discussion on content governance and children’s Responding to the war in Ukraine happen in the late 2021 follow-up consultation), and disclosures – EOS met with the Sustainability Accounting Russia’s invasion of Ukraine has profoundly impacted Prioritising our priority engagement targets wanted to be proactive in understanding the impact of Standards Board (SASB) sector lead for technology and countless lives whilst increasing geopolitical instability. As part of our Paris Portfolio Alignment Project, we this on the PPF investment portfolio. We decided that an communications, where it learned about the planned We are not directly dependent upon any organisation are now identifying companies that are our highest evidence-based bottom-up approach to calculate our evolution of the organisation and the trajectory of its based in either Ukraine or Russia. We are, however, priority engagement targets in the transition to own portfolio alignment was best. However, the Net Zero standards. EOS o昀昀ered to provide input on SASB’s content monitoring the situation closely to identify any Net Zero, which will include many in the Utilities, frameworks available at that time only covered a quarter governance and future projects as they emerge, and will general risks (such as the increased threat of cyber Energy and Materials sectors. We will work with of our own asset allocation (as our signi昀椀cant allocation share the EOS digital rights principles. EOS pointed out the attacks) that arise so they can be mitigated in an our stewardship services provider EOS and external to liability hedging instruments and private markets assets gap in children’s disclosure. SASB acknowledged this gap appropriate manner. fund managers to ensure these companies are held were both considered out of scope). and believes it could be addressed in a potential future project on user safety. It shared its materials on its current Operationally, the war has not had a material e昀昀ect to clear and measurable progress, through both As we were not aware of anyone else who had undertaken content governance project, which includes a focus on the upon us. We pay compensation to members who company- and sector-level engagement. this for the other asset classes, we appointed an external metric of 昀椀nancial spend and asked for EOS’s feedback. are based in Ukraine and to other members who consultant, Ortec Finance, in early 2021 to help us achieve are based in Russia. We make payments only into Net Zero Stewardship Toolkit objective baseline assessments for each of our asset class APPCGG meeting on ESG governance – EOS participated accounts operated by organisations that have not We are also reviewing how to apply the IIGCC’s Net portfolios. This also allowed us to actively shape product in an All Party Parliamentary Corporate Governance Group been sanctioned by the UK Government. Where Zero Stewardship Toolkit, which was launched in April development for this work with one of the market-leading (APPCGG) meeting where two current and one former UK we have been paying into an account operated 2022. We are discussing the toolkit with some of our teams in climate scenario analysis. The outcome of the DWP board chairs spoke on the topic of ESG governance. The by an organisation that has been or is about to be managers to see how they intend to use it. The toolkit consultation was published in June 2022, which set out the discussion included re昀氀ections on the growing signi昀椀cance sanctioned, we communicate with the member aims to raise the bar for investor climate stewardship requirement for schemes to report on portfolio alignment of ESG topics in UK boardrooms and a debate on whether with the aim of moving the payment into an by providing a systematic framework to help ensure metrics in its amended statutory guidance. Initiating our these issues should be handled by the full board or via a account operated by an organisation that has that institutional investors such as pension funds project early back in 2021 meant that we can already separate committee. not been sanctioned. prioritise high-impact engagement and have measures demonstrate our work on our portfolio alignment. More detail in place to hold laggard companies to account. on this project is provided in our Climate Change report. Our policy engagement through IIGCC The war in Ukraine could a昀昀ect us if it a昀昀ects the As active members of the IIGCC, we often join collaborative markets in which we invest and the sponsoring Key activities in policy engagement over the year initiatives on public policy. A couple of examples include: organisations of the schemes we protect. Sanctions Considering and promoting Regulatory standards and guidance around ESG issues are imposed on Russia required further review of exposure rapidly evolving. We follow these developments closely • We supported the 2021 Global Investor Statement to to the market. Although our ongoing exposure to the well-functioning markets and look to contribute to their progress wherever possible. Governments on the Climate Crisis that was published market is less than 0.01 per cent of the total value We engage with key entities globally on public policy that ahead of COP26, and supported by 587 investors managing of our fund, there are a limited number of holdings Collaborating to promote and improve market-wide risks promotes and enables smooth market functioning. We carry $46 trillion, urging all governments to raise their climate that we have not been able to exit due to market As a responsible asset owner, we feel it is important to this engagement out directly or through other groups such ambition and implement robust policies by COP26. We conditions. For equity holdings, given the risks of understand and seek to mitigate risks that arise from as our stewardship services provider EOS, through the PRI have since signed the 2022 Global Investor Statement, breaching various sanctions, we have taken the systemic market-wide issues. Systemic issues with and IIGCC. which will be formally published later in the year. decision not to vote at shareholder meetings. This is relevance to ESG include climate change, biodiversity, ESG • We are part of a policy working group organised by the being kept under review as industry practice develops. disclosures and reporting. These risks are identi昀椀ed by our Our direct policy engagement during the year: IIGCC on the development of the UK Green Taxonomy, ESG, Legal and Risk & Compliance teams, and our Strategy • DWP consultation on Climate and investment reporting: which feeds back participants’ views and inputs to the & Policy team. They are discussed as part of our monthly setting expectations and empowering savers: Climate Green Technical Advisory Group (GTAG). The GTAG dashboard meetings with our Chief Investment O昀케cer and and investment reporting Consultation DWP (ppf.co.uk) provides independent advice to the UK Government Head of Investment Strategy. on implementing a UK Green Taxonomy. The objective • DWP consultation on consideration of social risks As mentioned, we also believe that our involvement in and opportunities by occupational pension schemes: of the taxonomy is to help tackle ‘greenwashing’, key industry initiatives and collaborations, and tracking DWP_2021_social factors_consultation_PPF_response.pdf improve understanding of environmental impact to help consultations in the market, help us to e昀昀ectively horizon • Consultation on restoring trust in audit and corporate companies and investors make informed green choices, scan to identify and consider market-wide or systemic risks governance: https://www.ppf.co.uk/sites/default/ support investment in sustainable projects, and boost relating to ESG. 昀椀les/2021-08/Restoring-trust-in-audit-and-corporate- e昀昀orts to tackle climate change. One example is our Paris Portfolio Alignment Project, governance-consultation-PPF-response.docx which we initiated as a result of our horizon scanning. In • Consultation on proposals to update asset information 2020, the DWP consulted on introducing requirements for collected from DB pension schemes: Asset Class pension funds to assess how their portfolios are aligning Consultation Draft for Sign-o昀昀 (ppf.co.uk) with the Paris Agreement. Whilst not a formal proposal • Consultation on 昀椀rst review of the Insolvency (England then, the consultation referenced ‘portfolio warming’ or the and Wales) rules 2016: call for evidence: 昀椀rst-review- implied temperature rise (ITR) of portfolios as one potential insolvency-england-wales-rules-2016-consultation-PPF- metric that could add value. response.pdf

28 Pension Protection Fund Responsible Investment Report 2021/22 Escalation and exercising shareholder rights As discussed, we look to company engagement as This year, we now have direct oversight of the voting execution across all our listed equity mandates. Our our primary approach to fostering greater social or segregated mandates are instructed through the EOS voting Voting against board service, and our pooled funds have been set up to enable environmental responsibility among the companies split voting for our allocation of shares. Together, this allows recommendations is an us to exercise our voting power and ensure much greater important tool as part of a and other assets we hold. If this does not achieve consistency in our strategy, in particular for any companies and issues with signi昀椀cant importance. thoughtful escalation when the hoped-for outcome, we turn to escalation, Reporting on our equity voting necessary. However, we would including voting. We have seen an improved level of transparency from our try to engage with the company equity managers on voting, as a result of our ESG quarterly reporting templates. In addition, the split voting set-up gives in advance. us direct access to voting platforms so that we can run How we approach escalation Where we feel engagement has not been fruitful our own reports. This means that for the 昀椀rst time, we can and voting over a reasonable period of time, we may vote against present an aggregated view of our voting activity across our management on certain resolutions, such as reports and equity mandates. Therefore, the following voting statistics When we escalate issues accounts or the election of individual board members are aggregated across both our segregated and pooled responsible for poor environmental or social performance. equity mandates, unless otherwise stated. Where an engagement is not progressing at a su昀케cient pace privately with a company, there are a range of For example, we closely follow the AGMs of companies How we voted over the year potential escalation strategies that we, or our external selected by Climate Action 100+ and discuss with EOS or agents, can employ. These include: our managers if there is an important vote to be cast on The following tables and charts detail our voting activity for our behalf. We are also reviewing the emerging Say-on- the period 1 April 2021 to 31 March 2022. • collaborating with other investors or campaign groups Climate trend for formal resolutions on companies’ climate • issuing a public statement transition plans or reporting. However, we recognise Voting statistics April 2021–March 2022 • 昀椀ling a shareholder resolution. the challenge that many shareholders are not likely to How many meetings did we vote at? 4,923 have the resources to fully assess the credibility and Voting against board recommendations is an important robustness of these plans. This could lead to shareholders How many resolutions did we vote on? 54,053 tool we can use as part of a thoughtful escalation when simply supporting management rather than encouraging What % of resolutions did we vote on for which 99.9% necessary. However, we would try to engage with the a company to be as ambitious as possible. This year, we were eligible? company at board or management level to discuss this we’re extending this to having conversations with the in advance. proxy advisors about their policies that inform their Of the resolutions on which we voted, what % 79.9% recommendations on Net Zero related votes. did we vote with management? Our voting approach for listed equities Of the resolutions on which we voted, what % 20.1% The PPF sees voting as an essential tool from a stewardship did we vote against management? perspective in supporting engagement and enforcing Of the resolutions on which we voted, what % 0.6% shareholder rights. We commit to voting every share we did we abstain from voting? hold, except when its cost is prohibitive or it is not possible Of the meetings at which we voted, what % did 67.4% to do so due to operational reasons (for example, due we vote at least once against management? to share-blocking markets or overly complex power of attorney requirements). Generally, we aim to align with the voting policy of our appointed stewardship services provider EOS, but we still review voting recommendations for signi昀椀cant votes or high-pro昀椀le ballots.

29 Pension Protection Fund Responsible Investment Report 2021/22 ESCALATION AND EXERCISING SHAREHOLDER RIGHTS CONTINUED Voting activity Shareholder resolutions Meeting with at least one Vote against Regional breakdown Votes on shareholder vote against management How we voted 2021 management by issue Meetings in six regions voted resolutions per region Whilst the majority of shareholder proposals were seen in China (EM and Frontier Markets in the pie chart), this is a market-speci昀椀c structural nuance. These proposals are not adversary in nature as seen 4,923 54,053 10,829 4,923 1,708 in other markets around the world. The largest proportion of shareholder resolutions not supported by management is seen in North America, speci昀椀cally the USA. In addition to the governance- related proposals regularly seen in the USA, topics proposed by At least one vote against 80% Against management 18% Audit & Accounts 832 Europe 13% Europe 9% dissident shareholders included management workforce diversity and racial equity, Voted with management 20% With management 80% Remuneration 1,844 United Kingdom 4% United Kingdom 1% disclosure on climate transition Abstain 1% Board Structure 5,028 Developed Asia 17% Developed Asia 7% plans and the adoption of GHG Withhold 2% Capital Structure & Dividends 1,041 North America 22% North America 26% emissions targets. Other 326 EM and Frontier Markets 42% EM and Frontier Markets 55% The pie charts present our global approach to voting throughout Poison Pill/Anti-Takeover Device 15 Australia & New Zealand 2% Australia & New Zealand 2% the year under review. Climate-related proposals took the limelight Amend Articles 638 through the main voting season and this is covered in more detail on the following page. In addition to climate, we saw a signi昀椀cant focus on Shareholder Resolution 70 diversity at board level and within senior management. Executive pay Social & Ethical Against With Grand was also a focus topic in many markets given the level of disruption Shareholder Resolution 933 Report Category Abstain Management Management Total faced by society and knock-on e昀昀ect to corporate revenue due to Governance COVID. In the UK, as an example, shareholder dissent on executive Shareholder Resolution 49 Climate & remuneration reached a 昀椀ve-year high. Environment Environment 0 63 72 135 Investment/M&A 53 Directors’ Related 32 588 371 991 Governance 1 96 47 144 Other 0 79 11 90 Social Proposal 0 5 18 23 Compensation 0 31 20 51 Routine Business 0 177 85 262 Social Equity & Human Rights 0 10 0 10 Economic Issues 0 2 0 2 Grand Total 33 1,051 624 1,708

30 Pension Protection Fund Responsible Investment Report 2021/22 ESCALATION AND EXERCISING SHAREHOLDER RIGHTS CONTINUED Voting on climate issues BHP – Opposing a company’s climate transition plan Say-on-Climate – Say-on-Climate votes against 2021 saw the emergence of Say-on-Climate (SoC) BHP Group Limited is an Australian multinational how we voted in 2021 management by rationale resolutions proposed by management. The majority of mining, metals, natural gas and petroleum public these proposals were proposed by companies in the UK and company. The company proposed its climate transition Europe. Most of these companies were proposing a climate plan to shareholders at both the Australian and UK plan or climate-action report that had emissions trajectories 2021 AGMs. aligned with the Paris Agreement. Many of the proposals were intended to be one-time events with a minority We recognise the substantial progress the company of companies stating that a resolution would be put to has made in climate reporting, transparency and shareholders at a later shareholder meeting to approve scenario analysis, and the importance of the 27 6 progress and/or changes to their emissions strategy. company’s products in enabling a transition to Given the importance of the topic and the need to ensure a a low-carbon global economy. We remain concerned rigorous threshold for shareholder approval was set, we took that the company’s interim operational emissions a robust approach to voting on these resolutions. We did not targets (to 2030) are insu昀케ciently ambitious to be support six of the 27 climate-related management proposals considered aligned with the 1.5°C trajectory. As a that we voted on during the year under review (in contrast result, we chose not to support the transition plan at both AGMs on this occasion. Against management 22% to the main proxy advisor supporting all 27 proposals). The Insu昀케ciently ambitious short-term targets 4 primary reason for voting against the Say-on-Climate proposal With management 78% Lack of short-term disclosure 1 was the lack of ambition in setting robust short-term targets. 85% Disclosure and lack of ambition 1 Shareholder proposals on climate-related matters increased year on year, exceeding the number seen in 2018 following Voted ‘For’ across the combined President Trump’s withdrawal from the Paris Agreement. Interestingly, despite its relatively small 昀椀nancial market, Ltd and Plc AGMs we voted on 17 shareholder resolutions in Australia, surpassed only by the US, where we voted on 25 climate- focused resolutions. In terms of supporting climate-focused shareholder resolutions, we voted ‘For’ at 53 of the 71 resolutions, of which 46 were against management and seven were supported by management. AutoZone Inc – Supporting greenhouse gas Whilst the company disclosed some short-term targets Votes on shareholder resolutions by climate theme The primary reason for us emissions targets for GHG emissions reductions, no comprehensive GHG AutoZone Inc is an American retailer of aftermarket emissions reductions targets had been provided. In voting against Say-on-Climate automotive parts and accessories, the largest in light of the disclosure provided, a vote in favour of the was the lack of ambition in the United States. As You Sow, on behalf of the shareholder proposal was therefore justi昀椀ed. Elizabeth Gale Michaels Revocable Trust, submitted setting robust short-term targets. a precatory proposal asking the company to disclose short, medium, and long-term targets to reduce 70% 71 greenhouse gas emissions that are aligned with the Paris Agreement goals of limiting the global average temperature rise to 1.5°C. Voted ‘For’ the shareholder resolution Climate Change Action 10 GHG Emissions 13 Renewable Energy 7 Report on Climate Change 36 Advisory vote on Climate Action Plan 5

31 Pension Protection Fund Responsible Investment Report 2021/22 ESCALATION AND EXERCISING SHAREHOLDER RIGHTS CONTINUED Our criteria for signi昀椀cant votes Summary of some of our signi昀椀cant vote outcomes Along with guidance from the PLSA around signi昀椀cant Date of Vote Company Resolution For/Against Reasoning for voting decision Outcome of the vote votes, we also use our own criteria to 昀氀ag material votes Management that we need to scrutinise carefully. We have created a voting watchlist of companies (see below) for which we get 2 June 2021 Alphabet Inc (US) 3, 4, 5, 6, 7 Against management Five of the eight shareholder proposals were deemed to Level of dissent by particular coverage from EOS and have an agreed timescale on all noted resolutions warrant support including the proposals relating to equal resolution: Applicable for action to execute votes proactively for signi昀椀cant and voting rights across all types of stock. Other governance- to B Stock: material positions in our portfolio. After deciding our related shareholder proposals were supported, including vote intentions, we access the voting platforms of our appointing a director with human and/or civil rights 3 – 16.19% investment managers for any pooled mandates and submit experience and a report of whistle-blower policies and 4 – 31.51% vote instructions. This process was enhanced during the practices to assist in the analysis of underlying culture year under review as part of our voting consolidation. and employee morale. 5 – 10.51% 6 – 12.4% Our voting watchlist includes: • Companies where we own over 1 per cent of equity 7 – 13.58% • Companies that we hold directly (which we 4 March 2022 Apple Inc (US) 9 – Report on Civil Against Our manager supported proposals related to diversity 53.6% support for escalate to our CIO for a voting decision) Rights Audit and inclusion policies as we consider these issues to be proposal • Companies with speci昀椀c issues of concern a material risk to companies. (e.g., practices that are non-compliant with the UN Global Compact) 18 November 2021 Goodman Group Elect Rebecca McGrath Against A vote against was applied due to a lack of diversity at 20.8% against • Votes related to a speci昀椀c initiative in which (Australia) as Director board level. It is expected that a company should have a we’re involved (e.g., companies on the Climate diverse board, with at least 25% of board members being Action 100+ list) women. Companies are expected to increase female participation both on the board and in leadership Each quarter, our segregated voting and engagement positions over time. reports are uploaded to our website. We currently do not 17 September 2021 Alibaba Group (China) 1.1 – Elect Director Against Our manager has a longstanding policy advocating for 16.4% against publish resolution-speci昀椀c vote reporting. However, we will Joseph C. Tsai the separation of the roles of CEO and board chair. These respond to individual requests from members and other two roles are substantially di昀昀erent, requiring distinct skills stakeholders directly if a request for this information is and experiences. made following a vote. Apple Inc has committed to undertake a civil rights audit following a majority of investors voting in favour of the shareholder resolution. Goodman Group has appointed a second Next steps woman to the board in June 2022 resulting in 25% female board representation. No other notable outcomes have been recorded. We are currently looking at ways to share detail on our voting behaviour to all of our members via our members website. Given the PPF aims to provide a high level of transparency to all our stakeholders, we want to assess the feasibility of providing information on a resolution-by-resolution basis to ensure that it can be easily digested and understood.

32 Pension Protection Fund Responsible Investment Report 2021/22 ESCALATION AND EXERCISING SHAREHOLDER RIGHTS CONTINUED Exercising our rights in other assets CASE STUDY Our rights as a provider of 昀椀xed income debt to a company di昀昀er markedly from those as a shareholder. We 昀椀nd that Negotiating best governance as achieving large-scale change among 昀椀xed income issuers a private credit investor can often be more e昀昀ectively managed through industry- led initiatives rather than as a single investor. PPF funded the development of 155 new social However, we have developed a fully integrated approach to housing units in a London borough. The investment the assessment and oversight of our potential and ongoing will be serviced by securitised lease payments 昀椀xed income investments. As an example, in UK private ringfenced within a legal structure. credit, where data can be less readily available, we rely We set out to simplify what was a complex structure heavily on our internal due diligence process. This involves by delineating responsibilities to ensure all foreseeable signi昀椀cant engagement with management of private risks were addressed in a timely way. In particular, we companies. ESG considerations, in addition to commercial were keen to ensure that the local authority backing and risk-related analysis, are evaluated and concerns are this deal was set up contractually as the ultimate addressed within the process. safety net. Ultimately, if we are not comfortable with the terms of a To achieve rating parity between the structure and deal, we will not participate. However, we will often seek the sponsoring local authority, we ensured that to propose amendments to the terms of the agreement construction risk was removed from our transaction and ensure that any additional requests we have are and debt service payments bene昀椀ted from statutory incorporated into the deal and – where appropriate – the protections available to traditional borrowing in future structure of the company. As part of the ongoing that sector. management of 昀椀xed income assets, we will often continue to seek positive change once entering into an agreement Construction risk was addressed by establishing (see case study, right). a risk control framework. This included 昀椀xed cost In private market closed-ended funds managed externally, contracting, contractual guarantees to the constructor we have found that it is almost impossible to retrospectively from its ultimate parent, insurance protection and, if all change any contracts or side letter terms that were signed else fails, the council standing as ultimate guarantor. historically. Therefore, we look to obtain su昀케cient recourse Key to our investment thesis was the self-supportive in our side letters, so that if we determine that we no longer nature of the asset. This was deemed important to wish to remain invested in a portfolio company due to mitigate reputational risk and ensure the collateral an unmitigable risk, we have the option to transfer out of can provide meaningful protection enhancement. the fund.

33 Pension Protection Fund Responsible Investment Report 2021/22 Our aspirations for the coming year We will continue to engage with our external managers, issuers and other stakeholders to keep advancing standards so that we can all fully understand and manage the risks we face. We will continue to work on expanding and deepening our stewardship e昀昀orts, to maximise the resilience of our portfolio to material ESG and climate-related risks. Continue to work with our managers Continue to integrate Continue our work to Engage with our managers, issuers and public to improve their ESG and stewardship our focus on 1.5°C report on and reduce the policymakers to explore ways to improve the disclosures in line with our own evolving global warming PPF’s own operational level and quality of ESG data disclosure for limits across all our environmental impact reporting requirements and industry-led investment, analysis credit and private markets standardisation initiatives and reporting activities, including pre-investment Using the 昀椀ndings from our Portfolio Paris due diligence Continue to work Alignment Project, develop a stewardship with industry strategy to engage with the subset of initiatives to drive portfolios, sectors and companies identi昀椀ed positive societal as our highest priority engagement targets and environmental action among market participants Work with our managers, especially in real assets, to explore how to improve physical and adaptation risk analysis and understanding Develop a holistic Continue to work with our Alternatives sustainability strategy managers and on the eFront Outreach as part of the PPF’s project to improve ESG data disclosure three-year Strategy Plan in unlisted markets

34 Pension Protection Fund Responsible Investment Report 2021/22 Appendices Appendix A Appendix B Our ESG team Meeting the FRC’s • Claire Curtin, Head of ESG and Sustainability Stewardship Code • Daniel Jarman, Stewardship Manager As a 2021 signatory to the Financial Reporting Council • Iliana Lazarova, Senior ESG Analyst (currently (FRC)’s UK Stewardship Code, our report is seeking to on secondment) meet the reporting expectations set out by the Code’s 12 • Anna Paschaloglou, ESG Data Analyst principles. The table on the right aims to provide a guide on our compliance with the Code and where each principle is discussed within this report. Stewardship code principle Page reference 1 Signatories’ purpose, investment beliefs, strategy and culture enable Pages, 8, 9, 12, 14 stewardship that creates long-term value for clients and bene昀椀ciaries leading to sustainable bene昀椀ts for the economy, the environment and society 2 Signatories’ governance, resources and incentives support stewardship Pages 10, 11, 12 3 Signatories manage con昀氀icts of interest to put the best interests of Page 13, clients and bene昀椀ciaries 昀椀rst Appendices C & D 4 Signatories identify and respond to market-wide and systemic risks to Page 27 promote a well-functioning 昀椀nancial system 5 Signatories review their policies, assure their processes and assess the Pages 13, 39 e昀昀ectiveness of their activities 6 Signatories take account of client and bene昀椀ciary needs, and Page 14 communicate the activities and outcomes of their stewardship and investment to them 7 Signatories systematically integrate stewardship and investment, Pages 15, 16, 17 including material environmental, social and governance issues, and climate change to ful昀椀l their responsibilities 8 Signatories monitor and hold to account managers and/or Pages 18, 22, 23 service providers 9 Signatories engage with issuers to maintain or enhance the value Pages 18, 19, 20, of assets 21, 24, 25 10 Signatories, where necessary, participate in collaborative engagement Pages 26, 27 to in昀氀uence issuers 11 Signatories, where necessary, escalate stewardship activities to Pages 29, 30, in昀氀uence issuers 31, 32, 33 12 Signatories actively exercise their rights and responsibilities Pages 29, 30, 31, 32, 33

35 Pension Protection Fund Responsible Investment Report 2021/22 APPENDICES CONTINUED Appendix C Personal accounts Appendix D • subject to the Aggregation of Deals Clause, the Manager Our Con昀氀icts of Interest policies Our Personal Account Dealing policy requires all Our IMA and side letter terms and its Associates are authorised in any one transaction, transactions to be approved by line managers and the or series of transactions, where it is in the best 昀椀nancial Our formal Con昀氀icts of Interest and Code of Conduct C&E team. If there’s a con昀氀ict between the employee, relating to con昀氀icts interests of the Board, to act for more than one portfolio policies set out principles and procedures for identifying, member or PPF interests, we may create a list of restricted or client collectively (including the Portfolio) without the assessing and managing con昀氀icts. These policies are investments that our employees can’t invest in. IMA – Con昀氀icts of interest written consent of the Board. reviewed at least annually by the Compliance & Ethics The Manager and its Associates may, subject to the Side letter – Con昀氀icts of interest team and approved by the Executive Committee. Senior manager 昀椀tness and propriety checks principle of Best Execution and without prior reference to We have implemented a version of the FCA’s Senior the Board, e昀昀ect transactions in which the Manager has, If the General Partner determines that a transaction with Register of con昀氀icts and outside business interests Managers Regime. As part of this regime, the C&E team directly or indirectly, a material interest or relationship of or by the Fund presents an actual or potential con昀氀ict of The Compliance and Ethics (C&E) team maintains a register meets annually with senior managers to discuss their roles any discretion with another party which may involve a interest, the General Partner shall: of employees’ con昀氀icts and outside business interests, and responsibilities. This includes assessing any potential potential con昀氀ict of interest with the Manager’s duty to the (a) disc lose such con昀氀ict of interest to the Advisory Board which they review at least once a year. We also share con昀氀icts and forms part of the annual assessment of their Board. Without prejudice to the generality of the above: and seek approval thereof prior to engaging in such board members outside interests on our website. 昀椀tness and propriety to carry on their role. transaction; and • in order to mitigate the risk of such con昀氀icts of interest Ongoing training Other checks, as part of this 昀椀tness and propriety assessment, from constituting or giving rise to a material risk of (b) ensur e that any such transaction is on an arm’s-length All employees receive training on Con昀氀icts of Interest when include performance review (PDP) along with credit and damage to the interests of the Board, the Manager has basis on terms substantially similar to those which would they start and as part of ongoing development. They also background checks on a rolling three-year basis with self- implemented a con昀氀icts of interest policy (‘the Con昀氀icts otherwise be negotiated with an una昀케liated third party sign to say they’ve read, understood and followed these assessments carried out every year. Policy’) which identi昀椀es the circumstances which give rise and the terms thereof are disclosed to the Advisory Board. policies every year. to con昀氀icts of interest and documents the procedures to Procurement processes be followed in order to manage such con昀氀icts. Further Gifts and Hospitality policy When procuring new suppliers, we are subject to the Public information is available on the Manager’s Con昀氀icts Contracts Regulations 2015. Our Commercial Services team Policy on request; the Board acknowledges that it has Our Gifts and Hospitality (G&H) policy requires all makes sure new contracts follow the correct procurement access to a copy of the Manager’s Con昀氀icts of Interest employees to request sign-o昀昀 from their line manager process and are awarded fairly, based on objective criteria. Statement within the Corporate Governance section of and the C&E team before accepting gifts or hospitality the Manager’s website; over the value of £25. The Commercial Services team also maintains an ongoing • where a con昀氀ict of interest is found to exist, any The C&E team maintains a register of all gifts and hospitality assurance programme for all our suppliers. transaction e昀昀ected by the Manager on behalf of the that have been accepted and declined, with regular reviews The PPF operates a compliance programme that addresses Board will be in the Board’s best interest and on terms to make sure these are within acceptable levels. regulatory compliance for a number of topics with which no less favourable to the Board than those which would we have either chosen to comply or are required to comply have applied had there been no con昀氀ict; We also publish board member expenses quarterly on with. The compliance programme monitors and regularly • the Manager and its Associates shall make investment our website. reviews these areas to make sure we have up-to-date decisions having regard to the Portfolio’s interest and policies and statements in place, and that we are meeting shall have regard to their interests and the interests of the standards expected of us. their clients only in so far as is necessary to comply with the requirements of any 昀椀nancial regulatory authority; • the Manager and its Associates may act as agent or principal in any transaction on behalf of the Board for the account of the Portfolio without prior reference to the Board provided that the terms obtained for the bene昀椀t of the Portfolio are at least as good as those generally available elsewhere; • the Manager and its Associates are authorised in accordance with its duties under this Agreement to consider the advisability of including within the Portfolio or to e昀昀ect transactions on behalf of the Portfolio in the ordinary shares of, and/or other Securities issued by the Manager or its Associates; and

36 Pension Protection Fund Responsible Investment Report 2021/22 APPENDICES CONTINUED Appendix E Key themes for 2022 Modern Slavery Diversity & inclusion Our voting guidelines 2022 With a speci昀椀c focus on material issues, we identify key ESG Modern Slavery is a topic of key focus in the UK, with the Board diversity – We believe that board members should matters that are of particular importance in a speci昀椀c AGM Modern Slavery Act 2015 being the 昀椀rst globally leading broadly re昀氀ect the diversity of society and that there is value Our voting principles season and highlight them through targeted engagement. piece of legislation passed as an Act of the Parliament of the in diversity of thought, skills and attributes. We’re guided by the best practice as demonstrated by Where we feel that companies are consistently unreceptive UK. Given the systemic nature of modern slavery and the to engagement on certain issues, we will consider employing serious risk it poses to businesses and investors, we expect We’ll consider voting against relevant directors and/or our stewardship services provider, EOS, and our voting escalation techniques such as voting to oppose relevant all UK businesses covered by the Act to meet the reporting the chair where we determine that board diversity (by principles closely align with their global voting guidelines. board members or resolutions. requirements of the Modern Slavery Act. We further expect gender, ethnicity, age, relevant skills and experience, or • No abstentions: We aim to take an active position on the members of the FTSE 350 to be leading in this area, tenure) is below minimum thresholds and we determine matters open to vote and aim to either vote in favour Climate change and to take substantial action to address the prevalence the company is making insu昀케cient progress on diversity. or against a resolution and only abstain in exceptional Climate change is a key area of focus for us, and Net Zero of slavery within their supply chains. Thresholds may be set at a market level (for example, circumstances, such as where our vote is con昀氀icted, stewardship is a fundamental part of our approach to around gender and ethnicity) or may be applied globally a resolution is to be withdrawn, or there is insu昀케cient management of climate-related risks. Read our Climate The quality of reporting delivered under Section 54 of (for example, around skills and experience). information upon which to base a decision. change policy for more details. Through our stewardship the Act can act as an important marker for how seriously senior management are taking this risk. It improves Around gender diversity more speci昀椀cally, in the UK we will • Support for management: We seek to be supportive services provider and participation in collaborative accountability and enables companies to identify the consider opposing the nomination committee chair of any of boards and to recommend votes in favour of initiatives, we expect tangible progress around Net Zero areas of their business most at risk. Companies that meet FTSE 350 company where women comprise materially less proposals unless there is a good reason not to do so and work with both our managers and companies to the reporting requirements and clearly disclose the areas than 33 per cent of the board. For companies outside the in accordance with our voting guidelines, global or encourage the transition to a low-carbon economy. of their businesses most susceptible to modern slavery FTSE 350, we will do the same where there are no female regional governance standards or otherwise to protect In order to measurably track and encourage progress on bene昀椀t from increased investor con昀椀dence. Conversely, board members. We are likely to vote against the chair of long-term shareholder interests. climate, we utilise the management quality assessment non-compliance with the Modern Slavery Act poses a the board of any FTSE 100 company that does not have at • Consistency of voting: We aspire to be consistent in of companies that are analysed by the Transition Pathway serious risk to long-term investors. least one director from an ethnic minority background and our votes and positions in regards to speci昀椀c companies Initiative (TPI). We are also informed by the Climate Action has no credible plan to rapidly achieve this. or issues across our entire portfolio. We seek to provide 100+ Net Zero Benchmark for those companies included We are a member of the PRI collaboration initiative Votes Against Slavery. The purpose of this initiative is to engage In Japan, we are likely to vote against the nomination clarity of our positions through our asset managers and in this assessment. We also will be guided in our voting by with FTSE 350 companies around their public disclosure in committee chair or board chair if less than 10 per cent designated stewardship provider, in accordance with the industry initiatives around Net Zero alignment for both compliance with the Act, by writing to the board of each of directors are female, regardless of company size. In our RI strategy and stewardship priorities. However, we asset owners and our asset managers. non-compliant company with a targeted letter explaining China, ASEAN, Brazil, India, Mexico, Russia, South Africa recognise the limitations of investing across a range of We will consider opposing the chair or responsible directors the nature of non-compliance, and the steps needed to and Taiwan, we will consider taking a similar approach if mandates, especially the challenges of implementation of companies which: achieve compliance. companies have less than 20 per cent women on the board within pooled funds at times, and we do this on a best and the company fails to demonstrate a credible plan has e昀昀ort basis. • Rank below a level 4 (i.e. 3, 2, 1 or 0) in the latest We will consider withholding our support for the approval been put in place to meet this expectation. In the largest US • Engagement: Engagement is a fundamental aspect of Management Quality assessment by the Transition of the annual report and accounts at the company’s next companies, we expect at least 30 per cent gender diversity our RI strategy, which we apply across all asset classes. Pathway Initiative (TPI) AGM, should the required changes to achieve compliance and one or more ethnically or racially diverse directors. Within our Public Equity portfolio, we have identi昀椀ed a • Have been downgraded from a level 4 to 3 by TPI over not occur. Executive committee diversity – We extend our list of high-priority companies (‘watchlist’ companies) the previous assessment cycle expectations around diversity on boards to executive we’ll endeavour to engage with prior to voting against • Have a strategy that is materially misaligned with the committees or senior management as well. a resolution, if there is a reasonable prospect that goals of the Paris Agreement. this will either generate further information to enable In the UK, this includes a policy of opposing chairs of any a better quality of voting decision or to change the We’ll also consider voting against the management of a FTSE 100 company with an all-male executive committee, approach taken by the company. We’ll also seek to company in cases when they are not disclosing adequate and we will consider a similar approach in Australia, inform such companies of any anticipated votes against climate-related information, not only to the standards of the Denmark, France, Germany, Italy, the Netherlands, Spain management, together with the reasons why, through Task Force on Climate-related Financial Disclosures (TCFD), and Sweden. We will also consider voting against the chair our designated stewardship provider. For non-watchlist but to the 昀椀rst tier of climate disclosure such as CDP. of any FTSE 100 company with materially less than 20 per companies, we’ll inform companies on a best e昀昀ort basis. Transparency is the 昀椀rst building block for any progress on cent female representation in the combined population of On matters related to good governance such as board climate and we wish to see real improvements in the level the executive committee and its direct reports. independence, competent leadership, separation of the of disclosure in the market globally. governance roles, we leverage o昀昀 the deep expertise and recommendations of our stewardship provider.

37 Pension Protection Fund Responsible Investment Report 2021/22 APPENDICES CONTINUED Appendix F 6. What escalation processes do you have in place for Appendix G 1.5. The Bo ard has put in place a responsible investment Stewardship section of our ESG situations of continued underperformance on the Our standard RI external manager policy, addressing controversial weapons, company engagement objective? Please give two recent examples conduct and sovereign bond exposure detailed Questionnaire of where this has occurred in practice. contract terms further below: Our ESG Questionnaire is a scored mandatory list of 7. Please also describe in detail your approach to 1.1. The Fund P arties acknowledge the importance that the 1.5.1. The Bo ard will expect companies that are directly questions that prospective investment managers must voting shares, and whether your voting actions are Board places on principles of corporate governance involved in the production of anti-personnel landmines, answer on a pass/fail basis to progress through the tender determined internally or outsourced to a proxy voting and responsible investment. The Fund Parties agree to cluster weapons, chemical weapons and biological process. Below is a sample list of questions within the agency. If the latter, do you ever override the agency’s give appropriate consideration to the relevant principles weapons and of essential components of these Stewardship section of the questionnaire. recommendations? Please give a recent example. which may include the Principles for Responsible weapons to be excluded from its investment universe. 8. How do you approach ESG and climate-related ballot Investment, to which the Board is a signatory. The Fund 1. Ar e you a signatory or do you intend to apply for items in your voting decisions? Have you voted against Parties acknowledge that they have received, read 1.5.2. The Board will expect the Fund Parties to exclude from signatory status to the revised Stewardship Code in management and/or 昀椀led or supported shareholder and understood the Board’s Statement of Investment the investment universe sovereign bonds issued by 2020, or other national stewardship codes? Yes/No resolutions on ESG or climate issues? If so, please give Principles. The Fund Parties acknowledge the Board’s countries subject to complete UN arms embargoes an example of where you have done this, and your need to consider long-term and systemic risk factors in which the UK supports. a) If you are not a signatory to the Stewardship Code, rationale for doing so. order to manage risks which are relevant to its long-term please provide rationale. 1.5.3. The Fund P arties acknowledge the Board’s interest 9. How do you overcome challenges such as shareblocking investment horizon and its statutory responsibilities. in investee companies making all reasonable e昀昀orts 2. Please exp lain how active ownership practices, markets or stock lending procedures when looking to 1.2. The Fund P arties will have a process for monitoring to abide by the UN Global Compact and the OECD such as company engagement, are integrated into exercise your votes? current or potential investments in relation to relevant Guidelines for Multinational Enterprises and that the investment decisions. 10. What customisation do you o昀昀er to clients on voting long-term factors including environmental, social and Board expects its managers to assess the signi昀椀cance 3. H ow do you set objectives, measure progress and report decisions, can clients retain votes to determine in line governance (ESG) and climate-related concerns. The of risks and opportunities in relation to their fund’s on the outcomes of your engagement with issuers on with their own policies? Please also describe the fund- Fund Parties will ensure that their sta昀昀 apply due care investments. Such assessment may include, where ESG issues? speci昀椀c reporting on all voting that you provide. and diligence to implementing this monitoring process, applicable and appropriate, the consideration of the 11. Please describe what engagement activities you including considering the extent to which such factors above guidelines. The Fund Parties will assist the Board 4. H ow do you encourage better disclosure from carry out from a policy, market-functioning or generate investment risks or opportunities. as is reasonably necessary to manage reputational risk corporates, especially regarding climate risks? industry perspective. and/or investigations that may arise from individuals 1.3. The Fund P arties will, in accordance with the Board’s investments made where investee companies fail to 5. F or what percentage of investments (by value, over the commitment to responsible ownership set out in its abide by the above guidelines. Such assistance may last year) have you undertaken engagement on climate Statement of Investment Principles, engage in such include the sharing of the investment research or, in change, environmental, social and governance issues? activities as are appropriate in the circumstances to the extreme, divestment or future segregation of pro昀椀t monitor and in昀氀uence the management of the issuing or loss relating to any investment for which material – If percentage > 0, please provide detail on processes entities and other underlying assets, where such reputational issues arise; (e.g. on monitoring processes, engagement strategy) activity is considered by the Fund Parties to be likely by engagement topic. to enhance the value of such securities and in the best 1.6. In respect of clauses 1.5.1 and 1.5.2 above, the – Please provide recent examples of such engagement 昀椀nancial interests of the Fund. Fund Parties will be provided with a list of excluded and your assessment of the e昀昀ectiveness of your companies and countries which may be updated by stewardship activities, e.g. instances of positive change 1.4. The Fund P arties will procure the exercise of any voting notice given in writing from time to time using the at issuers versus the level of in昀氀uence you had on rights attached to the Portfolio investments on the form speci昀椀ed in Annex A, signed in accordance with the issuer. Board’s behalf, in accordance with the Fund Parties’s the Board’s signing authorities. Such noti昀椀cations may voting policy and any market-speci昀椀c guidelines be sent via email containing a scanned pdf copy of the – If percentage = 0, please explain why engagement approved by the Board. The Board reserves the right instruction, sent to the Fund Parties to con昀椀rm (or such was not undertaken. to rescind, upon one day’s advance written notice, other email account as is noti昀椀ed by the Fund Parties to the Fund Parties’s authority to make voting decisions the Board in writing). for speci昀椀c companies, issues or time periods. The Fund Parties will use best endeavours to facilitate such Board voting decisions to be implemented. The Fund Parties will have in place appropriate policies to manage any con昀氀icts of interest in relation to voting matters and shall report at least quarterly on all votes involving companies where the Fund Parties or an a昀케liate has a contractual relationship or other material 昀椀nancial interest.

38 Pension Protection Fund Responsible Investment Report 2021/22 APPENDICES CONTINUED 1.7. In addition, t he Board will provide the Fund Parties Appendix H with an Excel document con昀椀rming the constituents Our ESG review process of the Exclusion List as provided in the scanned pdf copy. Following receipt of such instruction, the Fund Our four-stage ESG review is an essential part of selecting and appointing managers that align with our principles. Parties shall use reasonable endeavours to e昀昀ect such exclusions within a reasonable timeframe and RI criteria and ESG considerations as part of our investment process will con昀椀rm to the Board that the portfolio has been brought in line with the requested exclusions. If it will 1. Request for proposal/ 2. Selection/ become clear to the Fund Parties that for any reason Stage identi昀椀cation due diligence 3. Appointment 4. Post funding it will not be possible to bring the portfolio in line with ESG Evidence of 昀椀rm-level Ensure ESG processes Binding ESG and climate Ongoing monitoring the requested exclusions, the Fund Parties will notify requirement and strategy-level ESG are in place, appropriate risk clauses inclusion in and engagement with the Board. policy; PRI support; and industry guidelines are legal documentation external managers, 1.8. The Fund P arties shall prepare and send to the Board capabilities or resources followed and reporting (e.g. IMAs, side letters) regular fund-level ESG, and such other person or persons noti昀椀ed from time for ESG integration is available carbon and stewardship to time to the Fund Parties in writing on behalf of the reporting; commitment to Board as soon as reasonably practicable and in any continuous improvement event no later than eight (8) Business Days after the end of the relevant quarter, quarterly reports on: 1.8.1. comp liance with the policies and standards set out in the Statement of Investment Principles and Principles for Responsible Investment, including any instances where those policies and standards were set aside in order to achieve investment objectives; 1.8.2. t he key material ESG and climate-related concerns and relevant metrics associated with Portfolio investments and an explanation of how the Fund Parties have sought to identify, monitor and manage them; 1.8.3. t he stewardship activities – including issuer engagement – during the reporting period, including evidence of the e昀昀ectiveness of those activities; and 1.8.4. v oting activities over the reporting period, including full disclosure of any votes and an explanation of any exercises of discretion under the Fund Parties’ voting guidelines and con昀氀icts of interest.

Statement We con昀椀rm that we have taken appropriate measures to ensure that our stewardship reporting is fair, balanced and understandable. Oliver Morley, Chief Executive Thank you to our members and employees for allowing their photos to be used in this document. Renaissance 12 Dingwall Road Croydon CR0 2NA T: 020 8406 2107 www.ppf.co.uk