Strengthening Our investment Escalation Message from Key highlights our stewardship Our progress Our purpose approach and Our approach and exercising Our aspirations for 19 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 Our approach to ESG integration Leading on RI standards We expect our external managers to in昀氀uence issuers, Standardising emissions reporting for Real Estate 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 Last year, we started asking our external Real Estate management, we have the opportunity to encourage This includes engagement, taking part in collaborative In line with our RI strategy, detailed in our 昀椀rst RI report managers to report carbon emissions data at the fund RI improvements in our investment portfolio across the initiatives, and being transparent about voting where we and on our website, we embed material ESG considerations level. We quickly realised that each manager reports world. We see this as an area where we can in昀氀uence have ballots. We regularly carry out in-depth reviews of our right across our investments and our work with external emissions using di昀昀erent methods assumptions and help set new standards for the asset management external managers’ activities to assess how they’re engaging managers, from manager selection through to ongoing and estimations. industry, particularly in private markets with less-developed on our behalf. We particularly scrutinise their stewardship, monitoring and reporting. We also engage with underlying stewardship practices. especially in relation to our key themes such as climate issuers in our portfolios and use our voting powers to We decided this year to request that managers report change, human and labour rights, D&I board governance advocate for strong ESG practices. emissions at the asset level using metrics recommended Listed equities have the best-established stewardship and executive remuneration (see page 28). by the Partnership for Carbon Accounting Financials practices. But – as shown on page 18 – they only make up Increasing our internal access to portfolio data (PCAF), a global initiative supported by key 昀椀nancial a relatively small part of our total portfolio. In asset classes We regularly review the services of MSCI, our main ESG data institutions that aims to standardise global emissions where good stewardship isn’t fully established, we aim to provider, which is rapidly expanding its breadth and depth accounting across all asset classes. identify and encourage the most thorough and e昀케cient of analysis, especially for climate-related analysis. Much Our Real Estate managers had some di昀케culty approaches. Our regular review meetings with our asset of this expansion feeds directly into Aladdin and FactSet, providing all the asset-level information required to managers often include partnership and education around our main portfolio management systems, so we can run enable true aggregation, but over 60 per cent (by asset these approaches and emerging developments. comprehensive ESG assessments for our listed Equity and value) were able to report PCAF Quality Scores for the Credit portfolios on the 昀氀y. We have broader ESG data emissions they calculate. and scores available through our portfolio management systems for 70 per cent of the Fund’s net asset value (NAV), We are very pleased that we took this 昀椀rst step toward Our key themes accounting for almost all of our listed holdings. standardisation, which should lead to more useful and better quality analysis. We look forward to working Environment Social We have more recently acquired access to MSCI’s Implied with our Real Estate managers, communicating the • Climate change • Wider societal impacts Temperature Rise (ITR) data. This indicates whether bene昀椀ts of PCAF metrics and generating the required • Natural resource stewardship • Human capital management companies align with the global goal of keeping average information to aggregate emissions accurately across temperature rises this century to well below 2 degrees our Real Estate holdings. • Pollution, waste and circular economy • Human and labour rights Celsius (2°C) to prevent the worst e昀昀ects of global warming. Setting exclusions Taking action We insist on a high level of responsible conduct from our underlying issuers, and seek to avoid investing in issuers During the year, we implemented ESG reporting that contravene international conventions or norms for across our internal Strategic Cash assets. These controversial activities that are rati昀椀ed into UK law – for reports are used by the relevant desk manager to example, the production of speci昀椀c controversial weapons. analyse individual holdings and report the funds’ We implement this through a small exclusion list, which is position to the Investment Committee. We use MSCI applied across the Fund as far as is practically possible. data to provide an analysis of the individual holdings Engagement and voting in the fund and then overlay this with qualitative Strategy, risk and communication Governance internal analysis of outliers 昀氀agged by MSCI. A As outlined in our full Stewardship Policy, we strive summary of the monthly analysis is provided along to extend our stewardship activities across our entire • Risk management • Shareholder protection and rights with detailed data sets for the manager to evaluate. investment portfolio. We amend our approach depending • Corporate reporting • Executive remuneration The desk manager was involved in the creation of the upon the asset class or strategy, how directly we’re invested • Business purpose and strategy • Board e昀昀ectiveness report template, with training provided on the MSCI in it and the level of control we can leverage. We believe scoring methodology. in engagement as a path for veri昀椀able and tangible impact regarding material stewardship issues. We’re strong advocates for supporting companies, governments and other issuers in building and sustaining good governance and progressing their practices on environmental and social matters. In order to incentivise issuers, we are committed to transparent voting following a robust assessment and review of the practices of a company. More on our approach to voting is on page 36 onwards.