Strengthening Our investment Escalation Message from Key highlights our stewardship Our progress Our purpose approach and Our approach and exercising Our aspirations for 25 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 Sovereign Debt – Debt issued by governments is a Absolute Return – For our Absolute Return mandates, fundamental asset class for many asset owners as we have so far predominantly monitored our physical well as being a pillar of a well-functioning economy. investments (leaving derivatives or synthetic instruments In emerging market debt (EMD), successful engagement aside for now). The two areas of most relevance are with governments often requires a concerted e昀昀ort over positions in long/short equity or credit and event-driven a long period of time. However, debt investors are vital strategies, where our managers have engaged directly for pressing governments on a range of topics, including with corporate issuers. transitioning to clean energy and stopping deforestation. We welcome the evolution of tools and data sets that Absolute Return engagements deepen the ability of investors to measure climate- Asset Class: Credit related and other ESG risks presented by sovereign bonds. Sector: Health Care Providers We strongly encourage our managers to contribute Issue: Allegations of residents’ mistreatment knowledge and resources to drive this progress further. Background: The Health Care Provider’s bonds and Sovereign issuer engagements stocks sold o昀昀 following the release of a book detailing the treatment of residents. Asset class: Sovereign Debt Action: Such price dislocation raised our external Issue: African frontier market manager’s interest and they investigated the Background: An African frontier market saw a situation. After analysis, the view was that the steep increase in Sovereign Debt levels under its company’s bonds were well collateralised but that previous administration, pushing public and external the equity holders were likely to be wiped out in a debt ratios to 120 per cent of GDP and resulting in a necessary restructuring. As a result, the manager still unresolved debt default. Constitutional provisions looked into building a long bond, short equity were in place to subject any new borrowing to position. However, it was noted that investing parliamentary approval but were not honoured by in such a troubled company could not be made the authorities due to the lack of a supportive legal without addressing the treatment of residents framework. The country also scores weakly on and the company’s governance concerns. Once a corruption and this has worsened in recent years. management change was implemented, our manager Action: One of our external managers wanted met with the CEO and CFO to understand their plans for addressing the historical poor treatment of to emphasise to the country’s authorities the residents and to stress that this was the cornerstone importance of public oversight on borrowing and to a successful turnaround. The company’s new urged a revamp of legislation in this area in order management was very receptive. Our manager was to make the country a more attractive long-term also comforted by the fact that a state-owned bank proposition to investors. The manager held meetings was involved, meaning that the restructuring would with the country’s 昀椀nance ministry and central bank receive both additional political commitment and authorities in 2020 and 2022. The 昀椀rst meeting was heightened scrutiny. used to urge action on the debt situation, including an improved legal framework. Although little progress Outcome: Since the scandal, the 昀椀nancial restructuring was initially made, a new administration took o昀케ce has been agreed and new procedures have been put in 2021, and introduced various reforms and agreed in place to improve the quality and oversight of the a loan programme with the IMF. Meeting the Ministry company’s services. of Finance in 2022 enabled additional discussion and assurances on a bill for loan approval governance. Outcome: Following the discussion in 2022 and the proposed legislative changes, the manager was comfortable introducing exposure to the country’s Sovereign Debt to the portfolio. The manager continues to monitor the parliamentary bill’s progress.