USS's direct infrastructure strategy and increase in target allocation was originally established in 2011. The scheme's approach to responsible investment focuses on the integration of ESG considerations into due diligence phase as new assets are added to the portfolio, as well as the oversight of assets post investment.
Enhanced due diligence
USS has adopted an Enhanced Due Diligence (EDD) process for infrastructure assets. The due diligence research aims to identify asset specific ESG issues to ensure these risks are managed. The EDD process seeks to identify any ethical, governance, reputational, environmental and social risks that could potentially affect the value of infrastructure investments. The process also considers whether the operators or managers (where relevant) have appropriate processes to mitigate these factors.
During the due diligence phase, EDD will consider ESG factors such as:
- Health and Safety management and performance
- Environmental management and performance including systems controls, pollution control, noise control and liabilities such as contaminated land and asbestos
- Climate change related risks
- Stakeholder relations, including planning, regulators, local communities and employees/ unions
- Governance - including internal controls, anti bribery and corruption concerns, key man risk, remuneration and alignment, other shareholders and board directorships
Post investment, the scheme will generally negotiate governance rights (such as a board position) to enable effective, regular oversight and management of the asset.
The scheme has an Asset Management and Operations team within the Private Markets Group (PMG) that oversee the on-going monitoring for the largest directly-held assets in the private markets portfolio, including the scheme's infrastructure assets. USS undertakes post investment visits which cover, amongst other issues, reviews of the quality of management of environmental and social issues at direct infrastructure assets.
The RI team undertakes dedicated ESG review meetings to have face to face discussion on how the asset’s managers are addressing ESG / CSR risks and opportunities. This programme is unusual: we are not aware of many asset owners implementing such a detailed and diligent approach to asset oversight on ESG issues. This programme is currently ad hoc, but we plan to make it more systematic in the future. These assessments involve extensive research beforehand, so that management can be interrogated with asset specific questions. The list below provides examples of the typical areas such questions would cover:
- Contractor oversight
- Human capital management
- Fuel stations
In addition, the scheme's RI monitoring processes were enhanced during the year to develop a more systematic review of ESG/ CSR management at the scheme's direct assets.
For corporate governance, an IFC governance assessment model has been adapted to reflect the nature of privately held assets. On environmental and social issues, USS has joined the Global Real Estate Sustainability Benchmark (GRESB) Infrastructure benchmarking process for infrastructure. This follows participation in the GRESB property benchmarking process since helping to found GRESB in 2009. Where an asset participates in the GRESB process, the findings are assessed as part of the ESG review process.
The results of face to face monitoring meetings with assets, noted above also feed into the assessment process.
The reviews feed into PMG's regular Portfolio Review Committee (PRC) meetings and enable a more comprehensive assessment of the current status of ESG management at the assets, and help to identify priority areas for enhancing ESG management practices.