Strengthening Our investment Escalation Message from Key highlights our stewardship Our progress Our purpose approach and Our approach and exercising Our aspirations for 23 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 Engagement in our UK Credit and Strategic Cash assets We take a nuanced approach to engagement within our Taking action Internal credit issuer engagements UK Credit assets, given that part of the book is invested in Sector: Automotives Sector: Financial Services public credit and part in private credit. These are generally The topic of quality a昀昀ordable housing in the UK Asset Class: Strategic Cash (short-term debt) Asset Class: UK Credit (HAIL assets) longer duration assets, so di昀昀er from our Strategic Cash came to the fore this year with concerns around Issue: Electric vehicles strategy and public Issue: Climate transition planning book which is much shorter in duration. mould, health and safety, and poor general policy advocacy maintenance of accommodation all receiving Background: A large US bank has faced numerous As largely listed instruments, our Public UK Credit and signi昀椀cant media coverage. Background: Engagement by EOS took place with challenges in recent years in relation to its conduct and Strategic Cash books have reasonable ESG and carbon data a large German automotives company regarding its culture. In addition to engaging on these, EOS has also coverage within our portfolio management systems. We can We have engaged with our external Real Estate level of ambition and lack of intermediate targets for engaged on the bank’s commitment to climate action, use these systems to monitor the portfolios regularly, along managers to understand whether action plans are in the company’s electric vehicle strategy. Its support for given its weak position in comparison to its US peers, with assessments from open-source initiatives. For example, place to address these issues and the extent to which certain industry bodies whose lobbying activities are calling on the company to produce a credible transition being an investor member of Climate Action 100+ has they have been incorporated into business. We have at odds with the goals of the Paris Agreement was also plan across its 昀椀nancing activities. helped us understand and engage with European energy also engaged with the UK Regulator of Social Housing highlighted as an area of concern. corporates on their transition plans when reviewing their to understand its e昀昀orts in enforcing accommodation Action: During meetings, concerns have been raised debt instruments for inclusion in our portfolio. standards, mindful of its other mandate to ensure Action: This has been a multi-year engagement, in relation to the quality of disclosure provided around 昀椀nancial viability. This matter will require ongoing involving site visits, investor-day participation and emissions 昀椀nancing activities across the bank. Although Our UK Credit and Cash assets are also under the remit engagement. We will continue to report on progress multiple in-person and virtual meetings with company the company has been open to engagement, progress on of our external stewardship services provider EOS, who as more information becomes available. representative, including the supervisory board chair disclosure has not met expectations and the perception engage with debt issuers on our behalf. The EOS platform and the head of external a昀昀airs and sustainability that the organisation is following its peers, rather than allows us to monitor the progress of all engagements executives. In addition, questions were submitted to taking a lead has not diminished. with an issuer (regardless of where we hold it in the the Board at Annual General Meetings in 2020, 2021 capital structure). and 2022. The company was urged to engage with a Outcome and next steps: As a result of this weak group of investors proposing a shareholder resolution perception of intent in relation to managing 昀椀nanced Our private credit assets are typically held for the long requesting increased disclosure on the company’s direct emissions, a vote was made in favour of a shareholder term and often have very little secondary market liquidity. and indirect lobbying. Examples of industry best practice proposal requesting a policy consistent with the This makes ESG due diligence assessments, issuer and guidance reports were also shared. International Energy Agency’s Net Zero Emission by 2050 engagement, and getting the right covenants in place scenario. Engagement with the company is ongoing. pre-investment absolutely critical. Outcome and next steps: The company has signi昀椀cantly Rising interest rates and the higher cost of borrowing have increased its ambition regarding electric vehicles. This reduced issuance of new credit. Overall, this has resulted in includes publishing ambitious EV sales targets, and higher quality issuances coming to the private market, with setting emissions reductions targets that take account The company was urged entities that operate in regulated sectors faring best. Where of the supply chain and end-of-use phase. necessary, over the last year, we have continued to decline In April 2022, the company announced: “To ensure that to engage with a group deals in private credit where there are governance concerns our government a昀昀airs activities and our engagement of investors proposing around an issuer. through the company’s memberships are consistent with the long-term goals of the Paris Climate Agreement, we a shareholder resolution are constantly reviewing these engagements” and that “we will provide more information on the company’s requesting increased Our private credit assets are individual government a昀昀airs activities so that our disclosure on the company’s typically held for the long stakeholders can better understand our e昀昀orts to achieve carbon neutrality”. In May 2022, its 昀椀rst Group Climate direct and indirect lobbying. term and often have very little Engagement Report was published, despite falling short of expectations. secondary market liquidity. Next steps will include providing feedback on the inaugural report and future emissions strategy. Encouraging stronger disclosure on the company’s transition strategy in relation to stakeholders and mitigation plans also feature in our Climate engagement roadmap.