7. ENVIRONMENTAL, SOCIAL AND CORPORATE GOVERNANCE (‘ESG’)
The Trustees believe that their primary responsibility is to invest the Scheme’s assets for the longer-term financial best interests of the Scheme’s beneficiaries, as reflected by the Trustees’ strategic investment objectives (including the Scheme’s investment time horizon). The Trustees believe that ESG factors (including climate change risks) can potentially have a material positive or negative financial impact on the Scheme.
The Scheme’s investment funds are chosen to aim to achieve the Scheme’s strategic investment objectives, with consideration given to ESG factors over the Scheme’s investment time horizon when these fund choices are both made and reviewed from time-to-time. The Trustees understand that ESG factors are more relevant for some asset classes than others, and so for example the Trustees expect to spend more time on growth assets than on LDI. The Trustees are aware of and regularly monitor the Scheme’s investment time horizon. The Scheme’s time horizon may change over time and will depend on the length of time for which benefits will continue to be paid and if/when the Scheme is expected to have sufficient assets to buy-out the liabilities with an insurer. The Trustees are able to take a long-term view of the Scheme’s investments when assessing managers’ performance and/or asset allocation.
The Scheme’s investment funds are deliberately and consciously chosen to align with the Scheme’s strategic investment policies and objectives, in particular the investment funds’ asset class exposure(s), the balance between different asset classes (where appropriate) and expected return and risk. In addition, the fees applicable to the Scheme’s investment funds are taken into account to ensure that these are also consistent with the Scheme’s investment policies and objectives, as well as being compatible with the asset class(es) that the fund invests in and the returns it is seeking to achieve.
A key element of the selection of the Scheme’s investment funds is the Trustees’ assessment of the likelihood of each investment fund achieving its performance target on a medium/long term and sustainable basis, which is in part based on each investment fund’s ability to select investee companies, for both debt and equity, that are sustainable and will produce good medium/long term performance on financial measures.
The Trustees also believe that, in general, good long term performance on non-financial measures will support and contribute to good long term performance on financial measures.
An important part of each investment fund’s ability to invest sustainably in this way is to use the fund’s position as a stakeholder, either unilaterally or in concert with other stakeholders, to engage with investee companies to look to improve their financial and non-financial performance.
The Trustees measure and monitor the performance versus target of all their investment funds on an after fees basis where practical to do so. Part of this monitoring process includes the consideration of the portfolio turnover costs of each investment fund and whether (or not) the twelve-month turnover is consistent with the investment philosophy and process of the investment fund. Any inconsistencies will be considered. The portfolio turnover costs will be part of the after fees fund performance and are therefore reflected in that figure.
The Trustees’ intention is to appoint investment managers for the long term and avoid switching between investment funds based solely on short term performance, thus incurring transaction costs which may or may not be offset by future returns. However, if the Trustees believe that an investment fund can no longer achieve its performance target, and believe that it is in the Scheme’s best interests to make a change, they will do so.
Due to the Trustees’ use of pooled investment funds, the application of ESG factors and the stewardship of the assets (including the exercising of voting and other rights attached to investments), are ultimately delegated to each investment manager and may differ depending on the objectives of each investment fund and the manager’s own policies in this regard.
The Trustees periodically obtain and review the relevant ESG and Stewardship policy documents for each pooled investment fund in which they are invested. When relevant, the Trustees will challenge the investment manager on their policies. Should the Trustees be unsatisfied with the response, they will take the approach that is believed to be in the best interests of the Scheme’s beneficiaries, which could involve further engagement with the investment manager or disinvesting in favour of a more appropriate investment fund. This creates an incentive for the investment manager to ensure that they are aware of, and as far as possible, meet the Trustees’ expectations with regard to ESG and Stewardship policy.
The Trustees do not explicitly take into account the views of the Scheme’s beneficiaries, including (but not limited to) ethical views and views in relation to social and environmental impact and present and future quality of life of the Scheme’s beneficiaries when making investment decisions.