Strengthening Our investment Escalation Message from Key highlights our stewardship Our progress Our purpose approach and Our approach and exercising Our aspirations for 20 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 INVESTMENT APPROACH AND INCORPORATING ESG CONTINUED Ensuring our external agents are Oversight of our external investment managers Below are the average scores within our Liquids portfolios aligned with our approach We apply robust RI requirements that all our external by each asset class: External agents (such as third-party asset managers and our managers must meet prior to investment (and on an Internal ESG & Stewardship Disclosure Score for external specialist stewardship services provider EOS) are critical to ongoing basis), to ensure we are fully aligned. We will managers of liquid assets (1 = lowest 3 = highest) helping us manage our investment portfolio e昀케ciently and not appoint or allocate more capital to managers that responsibly. We continually monitor these agents’ practices fall short of these standards. See page 21 for further Weighted Weighted in order to keep improving the quality and coverage of their detail on our manager appointment process, including average score average score stewardship activities and ensure consistency with our own our minimum requirements and case studies of how in 2022 in 2023 investment beliefs, policies and guidelines. we have engaged with managers prior to funding. Public Equity 2.6 2.2 Holistic oversight of our external agents is carried out We require disclosure of all existing and potential Absolute Return 2.1 2.2 across the Investment team, ESG & Sustainability team, managers’ policies, ESG integration and stewardship Global Credit 2.8 3.0 Operational Due Diligence (ODD) team and the Commercial processes and reporting to ensure they meet our Emerging Debt 2.2 2.7 Services team, ensuring robust analysis in the manager evolving expectations (see Appendix H). Quarterly selection process and throughout the life of our relationship stewardship reporting is required from all public markets Across asset classes, our external managers have with a manager. managers, and the quality of this reporting feeds into our accelerated their overall ESG disclosure and at least ongoing monitoring and ratings process. We also expect one manager’s score has been upgraded, with the rest Oversight of our stewardship services provider our Private Markets managers to provide this reporting, remaining stable except for Public Equity. The higher We have chosen to outsource stewardship activities for albeit less frequently. average score re昀氀ects improvements in engagement our segregated listed issuers to EOS, part of Federated e昀昀orts and climate analysis. See the case study on Hermes, to ensure that our shares are voted cost-e昀케ciently Our external managers are also reviewed by our Emerging Debt on page 25. and companies are engaged with where ESG concerns dedicated ODD team on a scheduled basis. The ESG & arise. Our 2020/21 RI Report provided more detail on Sustainability team works closely with the ODD team to The reason for Public Equity’s lower overall score is our selection process for these services. We carry out ensure that ESG considerations are fed into the review not because managers’ reporting has deteriorated but oversight of EOS’s engagement services for both our process. We screen for reputational risks associated because in some cases the manager’s reporting hasn’t segregated and direct investments. EOS also provides with personnel and request updates on their 昀椀rm’s D&I improved su昀케ciently to maintain a score of three. We voting recommendations to us for our segregated equities metrics in our annual ODD questionnaire, which is sent have engaged extensively with two managers that have in line with its published corporate governance principles. to all external managers. The ODD team also reviews been lagging – particularly in their stewardship reporting However, we are always in control of the vote and have managers’ policies in key areas such as ethics, business – and have started seeing some improvement as a result. the ability to exercise our voting rights in segregated continuity, disaster recovery and money laundering. We will consider upgrading these managers if they holdings in line with our own policy and principles. demonstrate consistent ESG performance. Internal ESG disclosure scoring model of our External managers are reviewed quarterly. We report external managers the distribution for the quarter to our Investment We also monitor our Private Market managers using the Taking action We have a thorough internal process to monitor and Committee and our Head of ESG & Sustainability raises any same scoring system, and are pleased to see that most track progress of all our external managers regarding identi昀椀ed risks. of them have started to provide information as part of ESG, with a focus on the bespoke ESG disclosure and the eFront ESG Outreach pilot project to improve ESG We monitor EOS’s activities through regular reporting they provide for funds we hold with them. The ESG & Sustainability team and the relevant internal disclosure within private asset classes (see page 21). emails and phone calls, more formal quarterly We identify laggards and leaders within each asset class, portfolio manager attend quarterly calls with external We have upgraded the score of those private market client meetings, and have fed back extensively on and we score managers by asset class accordingly from Liquids managers (the manager provides ESG reporting managers that have started to provide disclosure the usability of its client portal over the last year. one to three: in advance of the call). In the call, we engage with through eFront and we are engaging with remaining We also participate in EOS’s semi-annual client managers on their overall ESG e昀昀orts, we exchange non-respondents to provide greater transparency. advisory council meetings. • Funds that score ‘1’ do not meet our minimum views, and we raise requests with them. We have seen requirements and will not be considered for further a big evolution in ESG reporting across our Liquids Internal ESG & Stewardship Disclosure Score for external During the year we met with EOS to discuss funding if they do not show improvement. Funds managers. The 昀椀rst round of reporting we received in managers of private assets (1 = lowest 3 = highest) improvements to its controversies service. We also with this score are usually legacy holdings of funds 2021 included basic analysis of the fund’s ESG pro昀椀le Weighted Weighted agreed to adjust their annual engagement reporting in wind-down. and a few climate metrics. By the end of Q1 2023 – average score average score schedule to align with the PPF 昀椀nancial year-end. • Funds that score ‘2’ meet our minimum requirements thanks partly to engagement and the bespoke reporting Private Markets in 2022 in 2023 This means we no longer need to aggregate and are broadly satisfactory in their ESG practices templates we provided to managers – we were receiving Alternative Credit 1.6 1.9 engagement data from di昀昀erent reporting years and reporting. detailed reporting about each fund’s ESG pro昀椀le and internally, creating signi昀椀cant e昀케ciencies for outlook, stewardship and due diligence, carbon analysis Private Equity 2.3 2.5 our team. • Funds that score ‘3’ are leaders in the asset class and and climate stress testing and alignment. Infrastructure 2.5 2.5 showcase excellence. Property 2.7 2.7 Timberland and Farmland 2.6 2.6