Increased regulatory and industry focus on ESG issues (including climate change) is happening at a time when many corporate Defined Benefit (DB) pension schemes are in surplus and making plans to de-risk. That de-risking journey will likely make trustees of those schemes less able to take up the vanguard role of driving ESG policy as asset owners. A sustained period of successful investment coinciding with a favourable change in market conditions mean the Fund has reached a level of funding that allows the Trustee to target a buy-in for the Main and AA Sections of the Fund at some point in the future. With this new strategic objective, the Trustee is making significant changes to its portfolio.

The new strategy means the Fund no longer invests in listed public equities. As a result, the opportunities for the Trustee to directly influence corporate behaviour through investor voting are significantly reduced. The Fund is still able to engage with companies as a holder of debt and this activity continues through its stewardship partner EOS at Federated Hermes (EOS) and through its investment managers. As stewardship activity is less of a feature of the Fund’s investment programme, the Trustee has decided that it will no longer be a signatory of the UK Stewardship Code, which has a significant focus on shareholder voting. The Trustee continues to support the aims and principles of the UK Stewardship Code and will continue to encourage its investment managers to be signatories.

The Trustee continues to invest in its joint venture to build high quality net zero retirement homes across the UK. The California forest carbon credit project is gaining momentum with technical discussions underway with the regulator. The shipping portfolio energy saving retro-fit programme continues while the Trustee seeks buyers for many of its vessels as part of its strategic shift. The Trustee’s environmentally friendly 22-hectare greenhouse in Cambridgeshire is now producing food. The Fund’s diverse renewable energy portfolio continues to provide a stable source of alternative electricity and gas to the grid, though these are assets that do not help the Trustee achieve a buy-in, so the Trustee may look for buyers of these assets sooner than originally anticipated. Construction of a new recycling and waste to energy plant was completed in Wales. In the listed equity and debt portfolio, there has been a programme of engagement with 255 companies on a range of ESG issues.

More UK pension funds will be obliged to produce climate-related financial disclosures (Climate Disclosures) this year which should give a more comprehensive picture of the industry’s exposure to climate risks. TPR carried out a review of the Trustee’s Climate Disclosures for 2021 and provided specific feedback which has been considered by the Trustee and used to improve its Climate Disclosures for the period to 31 December 2022. The 2022 Climate Disclosures are appended to this report. A significant change this year is the inclusion of Scope 3 greenhouse gas (GHG) emissions of Fund investments. The strategic portfolio changes have also resulted in a decrease in exposure to companies that have set science-based targets (SBTs) for emissions reduction (as the Fund no longer holds equities in the large publicly listed companies that were focused on these targets). Notwithstanding the Trustee’s strong desire to manage climate risk, the strategy of getting the portfolio ready for a buy-in, which may require the Fund to exit some investments earlier than would otherwise have been the case, means that Fund climate risk and carbon footprint could increase over time and the likelihood of the Trustee meeting some of its climate goals may decrease, at least on a temporary basis. However, the Trustee has no plans to weaken any of its climate policies in respect of the assets which are compatible with the evolving strategy.

As part of the next step in the Fund’s evolution, the Trustee will look to bulk annuity providers for liability insurance solutions and in that process will consider the extent to which those providers take account of ESG issues and have established principles in line with the Trustee’s Responsible Ownership Policy (ROP). Insurer approaches to responsible investing and the data they will be able to provide the Trustee on climate and ESG issues will be a key consideration in the selection of an insurance counterparty and the Trustee will carry out appropriate due diligence and take advice to support its decision process.