Context

NatWest Pension Trustee Limited (the Trustee) is the corporate trustee of the NatWest Group Pension Fund (the Fund), a hybrid pension scheme for current and former employees of NatWest Group companies with four separate Sections. The Trustee oversees and manages the Fund in line with: i) the terms of the Trust Deed that governs the scheme; ii) the Statement of Investment Principles (SIP); and iii) applicable laws and regulations.

The Trustee has fiduciary responsibility for the Fund and its primary purpose is to ensure that the Fund has sufficient assets to pay its members’ benefits as they fall due. To meet this aim, the Trustee has an integrated approach to risk management, which takes account of all risks and opportunities including environmental, social and governance (ESG) considerations. Indeed, the Trustee believes that ESG considerations are integral to the Fund’s long-term success.

Integrated risk management incorporating ESG factors not only affects the Trustee’s investment choices (for example, investing in onshore windfarms and owning forests that are dedicated to carbon sequestration) but also, more broadly, its ownership and stewardship practices. The Trustee believes that effective stewardship can help protect and enhance the long-term value of its investments to the ultimate benefit of its beneficiaries, and has developed its own Responsible Ownership (RO) Policy and Modern Slavery Policy as well as aligning to the United Nations Global Compact Principles, which it integrates into processes to drive positive outcomes both for its members and also for the global communities in which the Fund invests. In doing so, the Trustee follows closely the principles of the UK Stewardship Code 2020.

The Trustee takes its role as a responsible steward of assets seriously and this is a regular topic of discussions at sub-committees. In addition, stewardship is regularly discussed with the Fund’s external investment managers and the dedicated engagement and voting service provider EOS at Federated Hermes (EOS) as part of the Trustee’s ongoing holistic process of portfolio review.

The Trustee’s activities

The Trustee has taken steps to ensure that its investment beliefs, strategy and culture enable effective stewardship.

The next page highlights several case studies of the stewardship activities undertaken across the Fund’s assets during 2021. These are only a sample of the actions taken over the year.

The Trustee uses RBS Investment Executive Limited (RIEL; its subsidiary and executive function) for strategic investment management, asset allocation, hedging decisions, manager selection and all related aspects of integrated risk management.

• Case Study: Listed equities: Engagement via EOS

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  Compass Group & Modern Slavery

  In Q3 2021, EOS met the chief people officer at Compass (a credit portfolio holding) to follow up on their collaborative engagement regarding modern slavery and were pleased to hear that its request for an independent review of the journey of migrant workers has been accepted. An audit will be conducted on the journey of migrant workers in the Middle East and it will cover recruitment, onboarding, living conditions and offboarding. The International Labour Organization’s indicators of forced labour will be used in this process.

  The company indicated that it has already improved some of its practices by offering cash advances when migrant workers land in the country, improving the food allowance, and facilitating employee representation. We continued to ask for an assessment of the company’s most salient human rights issues.

  An internal appointment has just been made in the team, with a specific responsibility for the wellbeing of frontline colleagues including migrant workers.

• Case Study: Real Estate: Being a Responsible Landlord

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  The Trustee oversees a substantial real estate portfolio (4.6% of the total assets). Over the 2021 reporting period, recognising the hardship being caused to many of its tenants by Covid-19, the Trustee and RIEL asked its investment managers to adopt a more supportive approach with affected tenants. As a result, managers proactively reached out to many tenants to offer deferred payment terms, easing their financial hardship and protecting both livelihoods and relationships.

• Case Study: Private Assets: Forestry and carbon sequestration

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  During the year, the Trustee asked RIEL to investigate the idea of retaining (rather than harvesting) some of its forestry assets in order to become an ongoing long-term ‘carbon store’. After consultation with the Fund’s forestry manager the decision was made to stop harvesting 170,000 acres of US forests, which are currently sequestering 7.8M of CO₂ each year. This natural carbon capture will very significantly offset the Fund’s carbon footprint over time.

The Trustee’s ESG sub-committee and RIEL meet quarterly to:

• Review whether investment managers are implementing the RO Policy – including stewardship activity – effectively to the various asset classes in the portfolio
• Review climate risk and opportunities
• Discuss evolving and/or sensitive investment related issues, such as degree of acceptable exposure to fossil fuel companies
• Respond jointly to public consultations by contributing own perspectives and experiences
• Review relevant policies and disclosures (e.g. Task Force on Climate-Related Financial Disclosures (TCFD) report, RO Policy, etc)

These meetings help the Trustee actively consider, monitor and address developments driven by broader, global ESG policy changes, investor action, technological advances and regulatory change.

In line with its RO Policy, the Trustee carries out engagement with, and exercises the voting rights attached to, its listed equity and investment-grade credit assets (the latter being 11% of total assets). The Trustee leverages an appointed specialist firm, EOS, to assist it with maximising its influence as an active owner. EOS brings significant resources and specialist, experienced individuals to manage the Fund’s engagement and voting activity. Over the 2021 reporting period it engaged across a range of topics from board structure, to remuneration, to corporate policy, climate change, and more.

EOS votes at company general meetings in accordance with the corporate governance and voting principles it has agreed with the Trustee. The Trustee believes that proxy voting activity should be conducted as part of a wider engagement strategy, rather than in isolation. The Trustee therefore encourages EOS to use appropriate discretion to vote against management where, after dialogue with the company, this is more likely to support long-term value creation and achievement of engagement objectives.

Outcomes

Over the 2021 reporting period the Trustee has made a concerted effort to execute the Trustee’s RO Policy and Modern Slavery Policy. Substantial progress has been made not only in the Fund’s listed equity and investment grade assets (where such activity is often focused) but also in the other illiquid and private assets. Member’s interests have been served by:

• Successful risk management: divestment from companies where climate-related risks are judged to materially impair the long-term value of that investment. For example, during 2021 the Fund divested from buildings which scored lower on the Minimum Energy Efficiency Standards scale to avoid the potential of the stranded asset risk.
• Reduced carbon emissions: additional investment in assets in the renewable energy sector, which have a positive climate impact and which offset carbon emissions elsewhere in the portfolio.
• Improved corporate practices: the Fund’s focus on addressing modern slavery (articulated through the Modern Slavery Policy) was reflected in the successful engagement with the Compass Group (one example among many) carried out on the Fund’s behalf by EOS.
• Making decisions in a way which aligns the need to protect the value of investments with that of being a responsible owner: the Covid-19 pandemic brought significant stress to many businesses. Our ability to directly influence our UK real estate managers in their approach to rental arrears was beneficial to UK businesses and the communities that they serve.

The Trustee continues to review and adapt its practices to ensure they reflect market developments and best stewardship practices. For example, although not all corporate engagements are successful, ongoing collaboration with other investors via EOS and engagement through organisations like Climate Action 100+ has gradually led to changes in corporate behaviour – particularly in the context of climate change and issuer disclosure in line with TCFD.

Furthermore, although the Trustee does not currently incorporate the views of its members, it continues to discuss possible methods of how to take account of member views.