The Trustees have agreed a responsible investment policy, which covers long-term sustainability, the integration of environmental, social and governance (“ESG”) factors, and stewardship of the Scheme’s investments. Sustainability is an important and evolving long-term trend, which is likely to impact financial returns and risks of different investments in different ways. Therefore, the Trustees have established a policy to set out their approach to the relevant issues.
Responsible Investment Belief
The Trustees’ views on sustainable investment and ESG are captured by the Trustees’ responsible investment belief below:
Long-term investment success should come from a focus on sustainability. In particular, environmental, social and governance (‘ESG’) factors can have a material impact on long-term investment returns. They should be considered before any investment is made.
- Investments with good or improving ESG ‘credentials’ are more likely to deliver long term sustainable returns
- The more long-term an investment, the more important ESG factors become
- Ignoring environmental and societal issues can create investment and reputational risk, which ultimately reduces return
- Being a good steward of assets can lead to better risk adjusted returns
Strategic considerations
The UN’s 17 Sustainable Development Goals (“SDGs”) provided the basis for establishing the Trustees’ strategic considerations. The SDGs are an articulation of the world’s most pressing sustainability issues and as such act as a globally supported sustainability framework. The Trustees have identified four strategic considerations that cover key long-term financial and reputational risks, and opportunities:
- Resource efficiency including water, food, renewables, waste reduction/pollution
- Just transition to a low carbon economy including clean energy, technology, regulation, local impacts (jobs, communities)
- Equality including human rights, labour rights, executive compensation
- Governance including board accountability for long-term success, reporting and disclosures
How these factors may impact the Scheme’s assets over the long-term is an important investment consideration. As a result these strategic considerations will be assessed and integrated into investment decisions and processes to help mitigate risks and identify opportunities.
The Trustees recognise that collective efforts towards the challenges of the SDGs will have a greater impact. Therefore, the Scheme will look to collaborate with other asset owners to better mitigate the risks and capture the opportunities from the SDGs.
ESG Integration
ESG factors should be properly managed and integrated into analysis and investment decision-making processes across the whole portfolio. The Scheme’s assets are managed by third party investment managers. Therefore, the main focus for ESG factor integration is the evaluation and assessment of those external managers’ policies and procedures in this area. Thoughtful manager selection and monitoring is crucial to ensure externally appointed investment managers employ best practice when integrating ESG into their investment decision-making processes.
External investment managers must be able to explain the ESG considerations included in making investment decisions. In particular, they must be able to demonstrate that where there is a material risk or return consideration to an underlying investment from one or more ESG factors, they are able to identify, model as appropriate, and consider the potential threats and/or opportunities to their investment case.
Stewardship
The Scheme is an active owner and the Trustees have signed up to the UK Financial Reporting Council’s “Stewardship Code”. The Trustees believe that being a good steward of assets can lead to better risk adjusted returns. In particular, widespread adoption of good Corporate Governance practice and a focus on long-term success will improve the quality of company management and is likely to increase the risk adjusted returns available to long term investors.
Where the Scheme has public equity investment managers with strong engagement and voting expertise, the Trustees allow these investment managers to engage and vote the equities they invest for the Scheme. For public equities managed by investment managers without this deep expertise, the Trustees have appointed Hermes Equity Ownership Services (EOS) to ensure their responsibilities as long-term shareholders of global equities are fulfilled. The Trustees believe that such oversight of the Scheme’s public equity shareholdings by Hermes EOS and investment managers with strong voting and engagement expertise (Baillie Gifford, Legal & General and Schroders) enables it to implement a high standard of stewardship.
Future Considerations
We do not expect the policy to stay static and this will be reviewed by the Trustees regularly. In 2020, the Trustees will be updating the Scheme’s approach to Stewardship in the context of the 2020 UK Stewardship Code. The Trustees also plan to review whether the Scheme should have specific investment exclusions.
Reports of Voting & Engagement Activity
Voting and Engagement for the Scheme is undertaken by Baillie Gifford, Schroders and Legal & General on the funds which they manage on our behalf and by Hermes Equity Ownership Services on all other listed equities.