Strengthening Our investment Escalation Message from Key highlights our stewardship Our progress Our purpose approach and Our approach and exercising Our aspirations for 26 Pension Protection Fund Responsible Investment Report 2022/23 our Chair of the year commitment at a glance and governance incorporating ESG to engagement shareholder rights the coming year Appendices OUR APPROACH TO ENGAGEMENT CONTINUED How we engage with private markets and unlisted assets Private Equity – Private Equity managers have a central Looking ahead, the manager believes the greatest Given the diverse nature of private markets, we take a role to play in the energy transition, given their ability to opportunity to reduce methane emissions (and improve Taking action nuanced approach to engagement within these asset classes. invest in and support businesses across the energy value emissions measurement) involves cutting-edge measuring We have continued to work with our managers in this space chain. For example, this year one of our managers identi昀椀ed and monitoring technologies. The manager and its portfolio During the year, Sanjay Mistry, Head of Alternative to increase their stewardship and engagement processes. methane emissions regulation as a key risk to its natural companies continue to evaluate monitoring solutions as Credit at the PPF, joined the UN-supported Principles resources portfolio companies – particularly given the new the technology advances and the economics of adopting for Responsible Investment (PRI) project, in Although progress is not always positive, we have been In昀氀ation Reduction Act (IRA), which stipulates that methane it improve. conjunction with the Alternative Credit Council, able to identify the leaders and laggards within our portfolio, emissions reported in 2024 by the US oil and gas industry to design a ESG Due Diligence Questionnaire (DDQ) which helps us assess future investment opportunities more will be subject to tax. Private Debt – Our Private Debt managers are less likely to e昀昀ectively. We look to our appointed managers to drive have signi昀椀cant control or leverage with underlying issuers. for private credit investments. This DDQ aims to help improvement in the companies and managers in which The manager proactively engaged portfolio companies However, we still expect them to engage where they do investors better understand and evaluate private debt they invest. We encourage managers to provide us with on ways to reduce the 昀椀nancial risk associated with have access to management. managers’ approaches to responsible investment. information on progress and demonstrate to companies these emissions. In 2022, many of its portfolio companies The document was published in July 2023 and Sanjay the value of more stringent sustainability practices. undertook an analysis to quantify the 昀椀nancial impact of the participated in the presentation of the document at IRA tax had it already been in place. Thanks to a concerted Private market engagements the launch event. Our interactions with general partners (GPs) and expectations e昀昀ort, the majority of companies had already achieved Asset class: Private credit of how they engage with portfolio companies will di昀昀er from signi昀椀cant reductions in methane emissions through Issue: Reaching sustainability and inclusion targets our expectations of our secondary managers, and how they measures such as replacing pneumatic devices, improving engage with underlying GPs. In terms of control, we have vapour recovery or deploying advanced emissions Background: One manager is demonstrating ESG Real estate – One of our property managers is responsible greater expectations around stewardship where GPs hold monitoring. As a result, upstream methane intensity has excellence and is exercising its power as a credit for the day-to-day management of a European (inc. UK) board seats or controlling stakes in companies. decreased 67 per cent since 2020, including a 46 per cent investor by introducing ratchets on credit margins property portfolio. As part of this role, they oversee the decrease over the past year, reducing the potential impact to some portfolio companies. These have included properties’ sustainability pro昀椀le. In 2021, the manager of the new tax. a 昀椀ntech platform that provides retail wealth launched a pilot with Smartvatten, a provider of remote management platforms to major 昀椀nancial institutions. water-monitoring devices. The pilot covered the Action: In this example, the manager was able to implementation of water-monitoring devices in 10 assets introduce ESG-linked margin ratchets that were across various locations and sectors over a 12-month symmetrical (upward and downward) to ensure the period. The devices have provided the fund with real-time company continued its progress on more inclusive insight into water usage at the properties and have helped sustainability and maintained ambitious targets. with detecting water leaks. Following the success of the The manager has put two ESG KPIs in place: pilot, the manager has instructed Smartvatten to roll out the device across the whole property portfolio. Some of the • Percentage of female professionals: To reach manager’s other European funds and clients are considering 47 per cent by year-end 2022 and 50 per cent using the same system. by year-end 2023. Infrastructure – We are invested in an Infrastructure fund • Sustainability indicators: Group carbon emissions that has three core investments all focused within Europe. to be reduced by c.10 per cent per year over It is engaging with all of its portfolio companies (including the next three years; percentage of assets under the ones that we hold with them), asking them to: devise administration focused on ESG strategies to reach a roadmap for aligning with Net Zero; complete a detailed 32 per cent by year-end 2022 and 56 per cent climate change impact assessment; and put in place key by year-end 2023. measures to achieve strong governance of climate-related These KPIs will reduce margins by 5bps if both KPIs risks and opportunities. Only one remaining company in are met, thereby reducing the company’s cost of the fund is still to set targets. Eighty-four per cent of energy borrowing or raise margins by 5bps if neither KPI generated in the fund is from renewable sources. Apart from is met, thereby increasing the cost of borrowing. climate change, the manager is also engaging all holdings on health and safety, diversity, governance, and employee engagement. We receive detailed reporting on progress in all these areas.