Context

Engagement is a fundamental part of the service provided by EOS at Federated Hermes (EOS) to NatWest Pension Trustee Limited (the Trustee). The Trustee has been a client of EOS since 2012 and can demonstrate several engagement successes at companies held in the NatWest Group Pension Fund (the Fund) portfolio over time. The enduring nature of the EOS relationship is indicative of the effectiveness of collective engagement and the ability of EOS to adapt and improve its service over time.

The Trustee views engagement as an effective activity for managing agency risk. It will continue to be a key part of the Trustee’s approach to responsible ownership. EOS represents a global client base of institutional investors who believe that effective stewardship needs substantial resource and expertise. EOS advises on its clients’ listed equity and corporate bond assets of approximately $1.1tn. Clients are asked for feedback on their engagement priority areas and process as part of the annual review of the Engagement Plan which guides EOS in their engagement work in subsequent periods.

The Trustee’s policy is to participate in collaborative engagement where possible. There are no cases in which the Fund holds such a significant number of listed securities of an individual issuer that it might hold influence over that company’s board. This is true of most pension funds. Greater impact is achieved through the partnership with EOS and its other clients and by supporting initiatives such as CA100+. The Trustee is better able to apply its policies consistently across all its listed securities by working with EOS.

EOS has a clear framework for engagement, including identifying when its interactions are proving successful and when they are unlikely to reach a favourable conclusion. It may take a considerable period of time before management is willing to hear and adapt to investor concerns. Decisions about allocation of resource and the nature of engagement activity are a matter for the EOS business which is best able to judge what path is likely to lead to success. The Trustee is involved in shaping the Engagement Plan annually, but typically does not otherwise seek to influence the conduct of the EOS engagement process which is carried out on behalf of a number of clients. EOS is also a key partner in the CA100+ programme which directs some of its engagement work.

The decision to appoint EOS for this role was made on the basis that, among other things:

• The Trustee believes that EOS is better resourced for this activity than the Trustee could be by itself
• The Trustee has reviewed, and is comfortable with the robust, repeatable processes that EOS has put in place to manage its engagement and voting activity
• The Trustee believes that the combined impact of all EOS’s clients is more likely to elicit change from investee companies than any individual investor could achieve alone

EOS’s proprietary milestone system allows it to track progress in engagements relative to the objectives set at the beginning of its interactions with companies. The specific milestones used to measure progress in an engagement vary depending on each concern and its related objective.

They can broadly be defined as follows:

• Milestone 1

  Concern raised with the company at the appropriate level

• Milestone 2

  The company acknowledges the issue as a serious investor concern

• Milestone 3

  Development of a credible strategy/Stretching targets set to address the concern

• Milestone 4

  Implementation of a strategy or measures to address the concern

Alongside the engagement and voting services, the Trustee expects EOS to:

• Report to the Trustee and RBS Investment Executive Limited (RIEL) on engagement and voting activity, including progress against the milestones
• Monitor the performance of companies against the UNGCP (United Nations Global Compact Principles)
• Engage on relevant government policy initiatives
• Promote collaboration between asset owners

The Trustee receives quarterly reports from EOS summarising the engagements that have taken place that quarter. A consolidated review is provided in the Annual Review on engagement which the Trustee reviews and provides feedback on any concerns.

Engagement in private investments takes place through the relevant investment managers or board representation.

Activities & Outcomes

Each year, EOS asks its clients to identify their priority areas of focus for engagement. This ensures that EOS is pursuing the mutually agreed priorities of its clients. During the reporting period, RIEL identified the Trustee’s priorities as:

• Climate change
• Human capital (e.g. Diversity & Inclusion (D&I))
• Corporate conduct (e.g. anti-corruption, data security)
• Business strategy & risk management (including around climate change)

In addition, RIEL asked EOS to increase their focus on social aspects and the data available to track those.

Over the reporting period, EOS engaged with 242 companies on 1,132 engagement objectives with 65 objectives completed. Its holistic approach to engagement means that it typically engages with companies on more than one topic simultaneously.

Theme	Total Engagement Objectives	Engagement objective status (last milestone completed)				Closed engagement objectives
		Objective set	Milestone 1	Milestone 2	Milestone 3	Milestone 4	Discontinued
ThemeTotal engagements	Total Engagement Objectives492	Engagement objective status26	Engagement objective status99	Engagement objective status164	Engagement objective status118	Closed engagement objectives67	Closed engagement objectives18
ThemeEnvironmental	Total Engagement Objectives182	Engagement objective status17	Engagement objective status25	Engagement objective status61	Engagement objective status49	Closed engagement objectives24	Closed engagement objectives6
ThemeSocial and ethical	Total Engagement Objectives111	Engagement objective status5	Engagement objective status22	Engagement objective status41	Engagement objective status27	Closed engagement objectives15	Closed engagement objectives1
ThemeGovernance	Total Engagement Objectives127	Engagement objective status0	Engagement objective status33	Engagement objective status37	Engagement objective status24	Closed engagement objectives23	Closed engagement objectives10
ThemeStrategy, risk and communication	Total Engagement Objectives72	Engagement objective status4	Engagement objective status19	Engagement objective status25	Engagement objective status18	Closed engagement objectives5	Closed engagement objectives1

Focussing on the priority areas identified by RIEL:

• Climate change featured in c. 20% of the engagements
• Human capital featured in c. 10% of the engagements
• Corporate conduct featured in c. 5.0% of the engagements
• Business strategy & risk management featured in c. 10% of the engagements

• Case Study: Heineken

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  EOS engaged with Heineken, a Dutch brewing company, in regard to sustainability strategy, gender diversity in the executive team and D&I – all areas that the Trustee considers a high priority.

  EOS engaged to note Heineken’s new commitment to decarbonising its production by 2030 and achieving carbon neutrality across its value chain by 2040, and sought an update on the development of a pathway for how it intends to deliver this. The company has just released a roadmap covering 80% of its journey, including agriculture, processing of raw ingredients, brewing, packaging, logistics and cooling. Its 2030 ambition has been approved by the Science-Based Targets initiative with Scopes 1 and 2 being compliant with the 1.5°C pathway. Heineken will continue to work on this initiative, adopting a long-term net-zero methodology and aligning its Scope 3 targets with 1.5°C.

  In addition, EOS welcomed new commitments to achieve 30% female representation in senior management by 2025 and 40% by 2030, plus 65% regional nationals in country leadership teams by 2023. EOS asked whether the company had a plan to set a target for the executive committee. Many companies are now seeking to achieve a gender balanced executive committee, often by 2030 and hoping that this will be achieved sooner.

  Disappointingly, there is no intention to set additional targets. The executive committee is comprised of eleven members with only two women. EOS will also continue to engage on this.

• Case Study: Alphabet

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  In Q3 2021, EOS engaged with Alphabet regarding D&I disclosure on behalf of the Trustee. The company described the need for workforce diversity, equity and inclusion (DEI) initiatives and marginal progress on governance during an environmental, social and governance (ESG) investor call. The chief diversity officer said the company is working to increase inclusion and meet targets of 30% representation of underrepresented groups in leadership. Examples cited included changing the recruiting focus from cultural fit to cultural add and adding racial equity to new hire orientation. While gratified by the company’s increased focus on DEI, EOS on behalf of the Trustee will continue scrutinising whether it achieves meaningful cultural change. The corporate secretary said the board is responding to investor concerns by reducing the maximum public board commitments to four and developing a new bonus structure incorporating ESG performance. However, the board will not change the multi-class structure, which it believes insulates the company from short-term pressures. On human rights, the corporate secretary restated prior disclosures including that as a founding member of the Global Networking Initiative it is subject to periodic independent reviews. EOS will continue engaging, including on digital rights.

• Case Study: Private Assets

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  The Trustee has allocated a significant proportion of its capital to growth assets which it owns directly (either as sole owner, or in joint venture or smaller consortiums with other investors). These are investments where the Trustee, RIEL and its asset managers can have a greater influence over management decision-making and in many cases certain key decisions are reserved for the shareholders. In deploying capital into these assets and during the period of ownership, RIEL ensures that asset managers take account of the Trustee Responsible Ownership Policy to develop assets with appropriate environmental and social footprints and with a fair and transparent governance framework.

  RIEL has worked with managers of the Fund private assets during the reporting period to improve their ESG policies and to encourage them to respond to the challenge of mandatory climate reporting. During the reporting period, RIEL has encouraged all managers of the Fund’s real assets to submit data for Global ESG Benchmark for Real Assets (GRESB) assessment. The Fund has experienced a trend of improving GRESB scores since this work started some years ago. RIEL has a particular focus on improving its real estate assets. Recognising that environmental performance of buildings is subject to increasing scrutiny, RIEL has worked with the Trustee’s property managers to improve the energy performance certificate rating of several of its buildings through appropriate works and capital expenditure.