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Universities Superannuation Scheme - USS

PRI reporting framework 2018

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ESG incorporation in actively managed listed equities

Implementation processes

LEI 01. Percentage of each incorporation strategy

New selection options have been added to this indicator. Please review your prefilled responses carefully.

01.1. Indicate (1) which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities and (2) the breakdown of your actively managed listed equities by strategy or combination of strategies (+/- 5%)

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied
3 %
Percentage of active listed equity to which the strategy is applied
97 %
Total actively managed listed equities 100%

01.2. Describe your organisation’s approach to incorporation and the reasons for choosing the particular ESG incorporation strategy/strategies.

 

The trustee of the Universities Superannuation Scheme is an active and responsible steward of the assets in which it invests. The trustee expects this approach to both protect and enhance the value of the scheme in the long-term. The trustee therefore requires its investment managers to integrate all material financial factors, including corporate governance, environmental, social (ESG) considerations, into the decision making process for all scheme investments, where they have a potential financial bearing.

The trustee requires this to be done in a manner which is consistent with the trustee's investment objectives, legal duties and other relevant commitments e.g. the UN backed Principles for Responsible Investment and the UK Stewardship Code. Specifically, the trustee has instructed USS Investment Management, as its principal investment manager and advisor, to follow good practice and use its influence as a major institutional investor and long-term steward of capital to promote good practice in the investee companies and markets to which the scheme is exposed. The trustee also expects its internal and external investment managers to undertake appropriate monitoring of current investments with regard to their policies and practices on all issues which could present a material financial risk to the long-term performance of the scheme such as corporate governance and climate change.

Further details relating to the scheme’s Statement of Investment Principles can be found below.

  • https://www.uss.co.uk/how-uss-invests/investment-approach

01.3. If assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]

USS takes an active approach to integrating ESG considerations into investment decisions and this is supported by thematic research into themes such as climate change and the transition to a low carbon economy.


LEI 02. Type of ESG information used in investment decision

02.1. Indicate what ESG information you use in your ESG incorporation strategies and who provides this information.

Type of ESG information

Indicate who provides this information  

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

02.2. Provide a brief description of the ESG information used, highlighting any different sources of information across your ESG incorporation strategies.

USS's service providers include but are not limited to the following: MSCI, BoardEx, Manifest, EIRIS, ECGS, Glass Lewis, Bloomberg and Trucost. The scheme also uses sell side research from major broking houses and smaller boutique research providers. For issue specific research and analysis USS also utilises organisations such as the Carbon Disclosure Project (Climate Change), Innovation Forum (Supply Chain Management), Impact Limited (Modern Slavery), Business Benchmark for Farm Animal Welfare (Supply Chain Management), EIRIS,  Business-Human Rights.Org (Human Rights) and analysis produced by NGO’s such as WWF, Greenpeace, Oxfam, Share Action,  Changing Markets, China Labour Watch, China Water Risk, SCRIPT and SPOTT.  Issue specific research and ratings provided by civil society are useful.  We are always looking for additional sources of material.

The advantage of having in-house resource is that USS can also undertake its own research. Research is also supplemented by information gained via engagement with companies. Information from such engagements is also passed to portfolio managers ensuring they have a broader range of information to help make better investment decisions.

USS's integrated approach to engagement means that the scheme fulfils Principle 2 (active ownership) and Principle 1 (integration of RI into investment decision making processes).

02.3. Indicate if you incentivise brokers to provide ESG research.

02.4. Describe how you incentivise brokers.

USS fully "unbundled" its equity research and broking fees in 2005 (many years  before MiFID II). Investment research is an explicit cost in the annual budget of USS and has been de-coupled from the execution costs for trading shares. This means we pay the brokers directly for research, rather than using soft commissions which "bundle" research and dealing fees together, as was common for the majority of investors in the industry.

The research budget is allocated desk by desk with RI holding a segregated budget allocation to reward brokers on investment research that incorporates ESG considerations, linked to materiality. Each desk reviews the research notes and analysis utilised, and allocates the fees directly to the research provider, in accordance with our view on the quality and range of research provided. We also complete the annual Extel survey and vote on performance of sell-side analysts. In addition, individual equity desks will also pay for ESG research out of their own research budget.  

USS was one of the first funds to raise broker fees as a potential barrier to the development of ESG research from the sell-side. The scheme helped to establish the Enhanced Analytics Initiative in 2004 to address this concern.

02.5. Additional information.[Optional]

USS fully "unbundled" its equity research and broking fees in 2005 (many years  before MiFID II). Investment research is an explicit cost in the annual budget of USS and has been de-coupled from the execution costs for trading shares. This means we pay the brokers directly for research, rather than using soft commissions which "bundle" research and dealing fees together, as was common for the majority of investors in the industry.

The research budget is allocated desk by desk with RI holding a segregated budget allocation to reward brokers on investment research that incorporates ESG considerations, linked to materiality. Each desk reviews the research notes and analysis utilised, and allocates the fees directly to the research provider, in accordance with our view on the quality and range of research provided. We also complete the annual Extel survey and vote on performance of sell-side analysts. In addition, individual equity desks will also pay for ESG research out of their own research budget.  

USS was one of the first funds to raise broker fees as a potential barrier to the development of ESG research from the sell-side. The scheme helped to establish the Enhanced Analytics Initiative in 2004 to address this concern.


LEI 03. Information from engagement and/or voting used in investment decision-making

03.1. Indicate if your organisation has a process through which information derived from ESG engagement and/or (proxy) voting activities is made available for use in investment decision-making.

03.2. Additional information. [Optional]

​All votes against management are discussed with the relevant portfolio manager prior to the vote being cast, other points of contention are also discussed.

The majority of ESG engagement meetings that involve the senior management of a listed company involve the portfolio manager and a member of the RI team.  Such engagements also normally involve an internal pre meeting and depending on the outcome, a post meeting discussion between RI and the Portfolio Manager will also take place.

Engagement meeting notes and voting letters are shared systematically with portfolio managers via an Internal Research Home (IRH) page on Bloomberg. This provides the equities, credit and RI teams with a record of how we voted and our view of the corporate governance arrangements at the firm. RI notes and voting records are also included along side the investment case on the 'equities tear-sheets' which are reviewed in preparation for company meetings.

Any decision to vote against management is shared with the company either before the vote is cast or as soon as possible afterwards via a formal engagement letter signed by one of the Co-Heads of the RI team.

Furthermore information can be found by following the link below.

 


(B) Implementation: Thematic

LEI 07. Types of sustainability thematic funds/mandates

07.1. Indicate the type of sustainability thematic funds or mandates your organisation manages.

07.2. Describe your organisation’s processes relating to sustainability themed funds. [Optional]

Please see details regarding how climate change has resulted in modifications to our Low Volatility quant portfolio under LEI 12.1.

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The scheme also offers members ethical fund and Sharia fund options under the Investment Builder defined contribution part of the scheme. These mandates are managed externally and discussed under the SAM section.


(C) Implementation: Integration of ESG issues

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate which ESG factors you systematically research as part of your investment analysis and the proportion of actively managed listed equity portfolios that is impacted by this analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]

The materiality of ESG factors varies between sectors.  USS aims to research all factors that could have a material impact on the performance of a company and share price.   This analysis is recorded on our RI Perspectives Report and is provided to the fund manager for discussion.  The RI team also analyses thematic issues in collaboration with colleagues in the equities team, and external organisations such as GIGN, ACGA and the Investor Forum.  

We take our stewardship responsibilities seriously and not all of the issues we analyse and spend time on are demonstrably material in financial terms over the short-term.  For example some of the issues we analyse and engage upon relate to reputational risk which is hard to quantify.   

This does not mean that they are not important: we will engage on long term issues even if they are not regarded as quantifiable at the time of the investment decisions.  See the LEA stewardship section for more details.  We believe that this multi-strategy approach to the management of ESG issues is in the best interest of our members.

 


LEI 09. Processes to ensure integration is based on robust analysis

09.1. Indicate which processes your organisation uses to ensure ESG integration is based on a robust analysis.

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

          We discuss ESG issues with companies as appropriate.  Our ESG research provider affords companies an opportunity to correct factual errors in their reports.
        

09.5. Describe how ESG information is held and used by your portfolio managers.

09.6. Additional information.[Optional]

Note on LEI 9.4: The ESG ratings reviewed by portfolio managers are refreshed on a real time basis, via an automated data feed from our research provider to our Bloomberg terminals. When a score changes the Bloomberg terminal is updated the next day. 

A research note outlining the investment case is completed by a portfolio manager for every active position in the USS Equity Portfolio.  CG scores and the environmental and social scores are automatically embedded in the template of this document.   In addition the RI team completes a report (“RI Perspective”) outlining the material ESG risks and opportunities that are relevant to the company.  We are working through our active equity portfolio to ensure that every company in the portfolio has a corresponding RI perspective.

MSCI ESG ratings are formally reviewed annually however the governance scoring process which is fully dynamic and applied consistently to all companies is updated quarterly or more frequently.   If the Corporate Governance score changes significantly this will trigger an off-cycle analyst review and may result in the change in the ESG rating.   Major controversies may also trigger off cycle ratings reviews.  USS also has access to the MSCI controversy reports which are updated dynamically

 


LEI 10. Aspects of analysis ESG information is integrated into

New selection options have been added to this indicator. Please review your prefilled responses carefully.

10.1. Indicate which aspects of investment analysis you integrate material ESG information into.

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

10.2b. Indicate which methods are part of your process to integrate ESG information into fair value/fundamental analysis and/or portfolio construction.

10.4b. Describe the methods you have used to adjust the income forecast / valuation tool

We review our portfolio for material ESG issues and where such issues are identified as potentially financially material an adjustment is made to the portfolio manager’s valuation.  Each desk has its own investment process, so the integration method varies between desk, sector and company depending on the conviction underlying the investment case and any assumptions made. The approach to integration taken by a portfolio manager will also depend on the nature of ESG risk identified and the time horizon over which the risk is expected to crystallise.

10.5. Additional information.

The RI team sits alongside the investment teams at USS Investment Management, and as documented throughout our response to the PRI report, RI matters are routinely considered within investment processes. RI participates in internal investment meetings and external engagement meetings alongside the investment teams. RI notes on macro themes are shared with Portfolio Teams when appropriate. Portfolio managers have access to quantitative ESG scores via their Bloomberg Terminals and RI information is available through the company Tear Sheets and RI Perspective Reports.  We also consider portfolio and company level ESG risks through dedicated RI portfolio review meetings.


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