Risk / Policy

Definition

Policy

Actions over reporting period

Interest rates and inflation

The risk of mismatch between the value of the Scheme’s assets and present value of the liabilities from changes in interest rates and inflation expectations.

To hedge 65% of the impact of interest rates and inflation on the value of the Scheme’s liabilities (measured on a gilts basis).

During the 12-months ending 31 December 2021, the Trustee successfully rebalanced the Scheme’s LDI mandate to a new target hedge ratio of 65% (on a gilts flat basis) against changes in inflation and interest rates, based on updated cashflows from the Scheme Actuary.

Liquidity

Difficulties in raising sufficient cash when required without adversely impacting the fair market value of the investment.

To maintain a sufficient allocation to liquid assets so that there is a prudent buffer to pay members benefits as they fall due (including transfer values), and to provide collateral to the LDI manager.

The Trustee monitors the Scheme’s liquidity position as part of quarterly performance reporting.

Market

Experiencing losses due to factors that affect the overall performance of the financial markets.

To remain appropriately diversified and hedge any unrewarded risks (e.g. interest rates, inflation), where affordable and practicable.

The Trustee implemented:

• A new allocation to a semi-liquid credit mandate of 15% of Scheme assets; and
• Rebalancing of the the LDI portfolio, to protect against interest rates and inflation.

Both allocations also serve to increase the Scheme’s overall level of diversification and were implemented in the first half of 2021.

Risk / Policy

Definition

Policy

Actions over reporting period

Credit

Default on payments due as part of a financial security contract.

To diversify this risk by investing in a range of credit markets across different geographies and sectors.

As mentioned above, the Trustee implemented a new semi-liquid credit mandate in early 2021.

No other Trustee actions or amendments were implemented over the reporting period in respect of credit risk.

Environmental, Social and Governance (ESG)

Exposure to ESG factors, including but not limited to climate change, which can impact the performance of the Scheme’s investments.

To appoint managers who satisfy the following ESG criteria, unless there is a good reason why the manager does not satisfy each criteria:

1. Responsible Investment (‘RI’) Policy / Framework
2. Implemented via Investment Process
3. A track record of using engagement and any voting rights to manage ESG factors
4. ESG specific reporting
5. UN PRI Signatory

The Trustee received training on the investment managers’ ESG policies in September 2021, in the form of an ‘Impact Assessment’.

Currency

The potential for adverse currency movements to have an impact on the Scheme’s investments.

The Scheme’s diversified growth and credit mandates hedge all currency risk back to Sterling.

No Trustee actions or amendments were implemented over the reporting period in respect of currency risk.

Non-financial

Any factor that is not expected to have a financial impact on the Scheme’s investments.

Non-financial matters are not taken into account in the selection, retention or realisation of investments.

No Trustee actions or amendments were implemented over the reporting period in respect of non-financial risks.

Areas for engagement

Method for monitoring and engagement

Circumstances for additional monitoring and engagement

Environmental, Social, Corporate Governance factors and the exercising of rights and engagement activity

• The Trustee’s investment managers provide annual reports on how they have engaged with issuers regarding social, environmental and corporate governance issues.
• The Trustee will obtain regular training on ESG considerations in order to understand fully how ESG factors including climate change could impact the Scheme and its investments.
• As part of ongoing monitoring the Trustee will use any ESG ratings information provided by its investment consultant to assess how the Scheme’s investment managers take account of ESG issues.
• As part of any manager selection exercise, ESG considerations are included as part of the evaluation criteria.

• The manager has not acted in accordance with their policies and frameworks.
• The manager has received a ‘red’ ESG rating from the investment consultant, signifying that ESG considerations are below satisfactory.

Manager and Fund

Engagement summary

Commentary

ASI Liability Aware Absolute Return Fund

ASI are currently unable to provide quantitative engagement data at the Fund-level.

ASI are looking to align their Fund engagement reporting with the Investment Consultant Sustainability Working Group (‘ICSWG’) reporting template once finalised later in 2021.

ASI notes that the funds which the Scheme are invested in are integrated portfolios, providing both liability hedging alongside a growth component. The liability hedging can be achieved via a combination of gilts, index linked gilts and inflation and interest rate based derivatives. Holders of such assets do not get rights such as voting at company meetings and so there is no voting data to be provided. The growth component invests in a diversified portfolio of assets, where there is equity exposure in that portfolio it is typically achieved synthetically, i.e., via derivative positions rather than physically holding the stock. This achieves capital efficiency in the fund but means that there are no voting rights associated with the stock exposure.

Baillie Gifford Diversified Growth Fund

Total engagements: 43
Meeting (AGM or EGM) Proposals: 14
Corporate Governance: 6
Environmental/Social: 22
Executive Remuneration:
1

The Fund invests in a wide variety of underlying direct assets, pooled funds and investment trusts, some of which are operated by third parties. Active engagement is therefore difficult as the team cannot directly influence ESG policy or voting on securities not held directly.

Baillie Gifford list the primary reasons for ESG engagement as: fact finding, monitoring progress, exerting influence and supporting the management team. The team prefer to encourage changes through engagement and dialogue rather than exclusion or divestment.

Examples of significant engagements include:

Greencoat UK Wind PLC – Engagement with the Chairman and Senior Independent Director to discuss the board’s engagement with investment managers and the carbon footprint of the portfolio operator. Baillie Gifford considered the responses of the company during this engagement to be positive/reassuring and will continue to monitor the company’s disclosures and climate commitments.

Enel SpA – Baillie Gifford engaged with the company in relation to climate queries, specifically their carbon impact. The company responded detailing their net - zero targets and efforts to both reduce exposure to fossil fuels and phase out coal by 2027. In addition to climate concerns, Baillie Gifford engaged with the company to raise concerns surrounding the company’s fatality and injury rates, enquiring about the measures implemented to reduce these going forward. Baillie Gifford will continue to monitor this going forward.

M&G Alpha Opportunities Fund

Total engagements: 9

Environmental and Governance: 1

Environmental: 4

Governance: 4

M&G have a systematic approach around engagements in which specific objectives are outlined in advance and measured based on the outcomes from the engagements.

M&G Analysts are expected to have a more granular
awareness of key ESG risks which impact the individual issues they monitor. Where engagements are deemed to be necessary, analysts engage with issuers supported by M&G’s Sustainability and Stewardship Team, allowing them to leverage their expertise and
sustainability themes. M&G monitor the success of engagement by assessing whether they have met their objective and log this in a central system.

Examples of significant engagements include:

BP Plc - M&G engaged with BP to improve their carbon data and emissions disclosures – in line with M&G’s Net Zero by 2050 target. BP acknowledged the feedback and following the discussions with M&G have outlined their plans to respond to the CDP 2021 Climate Change
questionnaire. This action was encouraged by M&G, as they cite the use of the CDP portal as an important tool in managing carbon exposure within their portfolio
companies.

HSBC - M&G engaged with HSBC to achieve a single climate resolution across both HSBC global bank and NGO ShareAction. Both had proposed separate resolutions regarding fossil fuels and Net Zero targets.

M&G met separately with both HSBC and NGO ShareAction to discuss their resolutions, making it clear that it would be better for all parties if a single resolution could be negotiated. The outcome of these discussions was the agreement of a suitable single resolution. Going forward, HSBC plan to put climate transition
plans to a shareholder vote.

Apollo Total Return Fund

Total engagements: 87

Environmental: 13

Social: 3

Governance: 5

‘Broad-based ESG’: 22

Other: 44

Apollo have a clear due diligence and engagement framework. The team continually engage with portfolio companies through discussion with management, and these engagements have been a key driver for the production for formal company ESG reports and Key Performance Indicators. As bond investors, Apollo’s voting rights are limited, making it more difficult to engage with portfolio companies in comparison to equity investors. 

Examples of significant engagements include: 

Adani Ports and Special Economic Zone Limited – Apollo engaged with the company in discussions over how they can improve their ESG. Areas of improvement which were identified were the company’s investment in Myanmar, their exposure to coal and the company’s overall governance. Following this engagement, the company has announced its exit from Myanmar and provided details of their steps to reduce their coal exposure. The company has also put together a Corporate Responsibility Committee of independent directors to aid in ESG commitments. 

Gazprom PJSC – Apollo engaged with the company to flag the relative weakness of their ESG disclosures, encouraging enhanced reporting. The company has subsequently launched a sustainability report with the help of Apollo and other investors.

LGIM LDI and Gilts

Total engagements: 48

Environmental: 13%

Social: 44%

Governance: 40%

Strategy/Other: 3%

Given the nature of the Fund, engagement is somewhat limited, and is conducted with underlying counterparties and banks as opposed to investee companies. Engagement with counterparties is through LGIM’s Investment Stewardship team, analysts, portfolio managers and traders, who include ESG in all their regular counterparty review meetings.

LGIM provide high level engagement statistics at a fund level within their quarterly ESG reports, based on the engagements of the companies held by the fund over past year.  Currently, engagement data is not applied to derivatives or government bonds within the LDI portfolio, however, LGIM are looking to provide more complete reporting for LDI in due course.

The following is an example of a key engagement over the year:

Barclays – At its 2020 AGM, Barclays issued a statement outlining its ambitions to align to the Paris Agreement. LGIM endorsed this proposal and have subsequently continued discussions with Barclays on its strategic approach to climate change. The Barclays resolution set out its long-term plans and had the backing of the ShareAction co-filers. LGIM plan to continue to work closely with the Barclays board and management team in the development of their plans. Additionally, LGIM will continue to liaise with ShareAction, Investor Forum and other large investors to ensure a consistency of messaging and to continue to drive positive change.

LGIM Cash Fund

LGIM currently do not provide details of their engagement activities at the Fund level, however, this is something they are looking to implement going forwards.

Isio remains in contact with LGIM surrounding the firm’s engagement reporting.

LGIM’s Investment Stewardship team are responsible for engagement activities across all funds. LGIM share their finalised ESG scorecards with portfolio companies and the metrics on which they are based.

Given the nature of the Fund, we believe engagement is somewhat limited, and is conducted with underlying counterparties and banks as opposed to investee companies.

Fund name

Engagement summary

Examples of significant votes

Commentary

Baillie Gifford Diversified Growth Fund

Meetings eligible to vote for: 132

Resolutions eligible to vote for: 1,505

Resolutions voted on: 88.8%

Resolutions voted with management: 96.0%

Resolutions voted against management: 3.4%

Resolutions abstained from: 0.6%

Ediston Property Investment Company PLC – Baillie Gifford voted against the proposed remuneration policy as they believed that the independence of the Senior Independent Director would be jeopardised by an additional fee. Despite this, the vote was passed. Baillie Gifford raised their concerns with company and will continue to exercise their votes in relation to renumeration if concerns remain.

Rio Tinto PLC – Baillie Gifford voted against a resolution of the remuneration report. Baillie Gifford disagreed with the decisions of the Remuneration Committee on the previous year’s executive severance payments and long-term incentive awards.

Baillie Gifford raised their concerns with the company following the vote.

All voting decisions are made by Baillie Gifford’s Governance & Sustainability team in conjunction with investment managers. Baillie Gifford analyses all meetings in-house and in line with their Governance & Sustainability Principles and Guidelines.

Whilst Baillie Gifford are cognisant of proxy advisers’ voting recommendations (Institutional Shareholder Services (ISS) and Glass Lewis), they do not delegate or outsource any stewardship activities or follow or rely upon their recommendations when deciding how to vote on clients’ shares. All client voting decisions are made in-house. Baillie Gifford vote in-line with the in-house policy and not with the proxy voting providers’ policy.