Developments and responsible ownership

Wider developments

RBS Investment Executive Limited (RIEL) monitors and responds to developments in the investment landscape driven by ESG policy changes, investor action and technological advances. There have been several material policy and market developments during the reporting period.

The Conference of the Parties (COP27) of the United Nations Framework Convention on Climate Change (UNFCCC) was held in Sharm El Sheikh, Egypt, between 6 to 18 November 2022. The Sharm el-Sheikh Implementation Plan was published on 20 November 2022. The text reaffirms the commitment to limit global temperature rise to 1.5°C above pre-industrial levels. However, "a clear emissions gap between current national climate plans and what’s needed" to meet this target remains. One of the headline outcomes was reaching agreement to compensate nations for loss and damage caused by climate change through the establishment of a fund.

The Conference of the Parties on biodiversity (COP15) took place in Montreal, Canada, in December 2022. This was the 15th meeting of the COP to the Convention on Biological Diversity (CBD), an international treaty for the conservation of biological diversity. The CBD was agreed in 1992 and has been widely adopted. The UK brought the CBD into force in 1993. COP15 saw the adoption of a new set of international goals for biodiversity called the Kunming-Montreal Global Biodiversity Framework (GBF). A total of 188 governments (including the UK) agreed to the GBF and committed to address the ongoing loss of terrestrial and marine biodiversity.

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The GBF contains four overarching goals and 23 targets. The four goals set out a vision for biodiversity by 2050:

  1. Substantially increase the area of natural ecosystems by maintaining, enhancing or restoring the integrity, connectivity and resilience of all ecosystems. Reduce by tenfold the extinction rate and risk of all species and increase the abundance of native wild species. Maintain the genetic diversity of wild and domesticated species and safeguard their adaptive potential.
  2. Ensure nature’s contributions to people are valued, maintained and enhanced, with those contributions currently in decline being restored.
  3. Share the monetary and non-monetary benefits of the utilisation of genetic resources, digital sequence information on genetic resources, and traditional knowledge associated with genetic resources with Indigenous people and local communities. Additionally, ensure traditional knowledge associated with genetic resources is appropriately protected.
  4. Ensure all parties (specifically developing countries) have adequate means to implement the GBF. This includes financial resources, capacity building, technical and scientific cooperation, and access to technology.

There is a possibility that protection of biodiversity becomes a more prominent consideration for pension trustees along with biodiversity reporting (similar to mandatory Climate Disclosures), but it is not currently being considered by the Trustee.

The European Commission adopted on 6 April 2022 technical standards to be used by financial market participants when disclosing sustainability-related information under the Sustainable Finance Disclosures Regulation (SFDR). This Delegated Regulation specifies the exact content, methodology and presentation of the information to be disclosed, thereby improving its quality and comparability. Under these rules, financial market participants will provide detailed information about how they tackle and reduce any possible negative impacts that their investments may have on the environment and society in general. The SFDR does not apply in the UK (it was not retained post-Brexit), however, in 2022, the Financial Conduct Authority (FCA) issued proposed rules to establish a UK Sustainability Disclosure Regime (SDR) providing a UK take on SFDR. The proposed rules were subject to consultation until 25 January 2023 and are expected to require both manager-level and product-level disclosures, introduce a fund labelling regime and set out anti-greenwashing guidance. The rules are expected to be finalised by the end of Q2 2023, with disclosure rules applying from 2024 and reporting commencing in 2025.

The Secretary of State for Business, Energy and Industrial Strategy commissioned an independent review of the government’s approach to delivering its net zero target, to ensure it is delivering net zero in a way that is pro-business and pro-growth. The Institutional Investors Group on Climate Change (IIGCC) provided a response on behalf of its members to the call for evidence as part of this review. The policy response is potentially relevant to the Trustee as it will continue to be a holder of UK gilts for some time and therefore has some interest in the UK reaching its net zero goal.

Our approach and responsible ownership activity

The Trustee divides its responsible ownership activity into five broad themes. Activity across those themes over the reporting period is described in the remaining sections of this report. The Trustee approach is best described by the phrase “engage your equity, deny debt and get active in your alternatives”. Voting and engaging issuers of listed equity has been shown to have real impact on board behaviour. Refusing to lend is the most direct way of limiting capital available to businesses that are unwilling to change their behaviour. Owning and continuing to invest in alternative assets with positive ESG attributes ensures capital is available to businesses aligned with the Trustee’s ROP. As mentioned above, the Fund sold all listed equities in 2022, but it did have equity exposure for some of the reporting period and applied its voting policy up to the point that those securities were sold.

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Together with its investment managers, the Trustee takes steps to actively monitor and take account of ESG issues when investing the Fund’s assets. The Trustee exercises voting and other rights associated with the assets it holds and engages with companies it invests in so that management can work to address investor concerns. The Trustee’s Asset & Liability Committee (ALCO) has approved the ROP and this was reviewed once during the reporting period (at the February ALCO meeting). The ROP includes principles which the Trustee and investment managers (on its behalf) apply to the investment process. The Trustee is prepared to sell assets that do not comply with those principles. Investment decisions are made by the Trustee taking account of all relevant factors in line with Trustee duties to act in members’ best financial interests. The responsible ownership governance process is integral to the investment management process overseen by ALCO. The Trustee’s executive team and retained investment adviser, RIEL, is responsible for strategic investment management and asset allocation which incorporates responsible ownership. ALCO has an ESG sub-committee (ESGC) with delegated responsibility for developing policy, monitoring and reporting of ESG issues.

Aon carries on its role advising the Trustee on responsible ownership issues, in particular, the Climate Disclosures. Aon carried out climate scenario analysis for the Trustee in 2021 using its proprietary models, the results of which are set out in the 2021 Climate Disclosures and repeated in the 2022 Climate Disclosures. Schemes are obliged to revisit their scenario analysis at least every three years. Although there have been significant changes to the portfolio recently, the Trustee views these as reducing climate risk and the funding improvements provide further protection against climate impacts on the portfolio and the sponsor covenant. The policy intention is that scenario analysis can influence Fund strategic and risk decisions, however, the buy-in focussed strategic decision has taken priority over any investment activity that might have taken place in response to identified climate risk or opportunity. The Aon scenario work indicated that the Fund is resilient to climate change (based on current knowledge and projected climate paths).

During the reporting period, the Trustee has received reporting on all ESG activity in the Fund and has received regular training on ESG issues, including climate change. The ESGC met each quarter to oversee implementation of the ROP and respond to market developments and public consultations.