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Universities Superannuation Scheme - USS

PRI reporting framework 2018

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Engagement

Overview

LEA 01. Description of approach to engagement

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

01.1. Indicate whether your organisation has a formal engagement policy.

01.2. Attach or provide a URL to your engagement policy.

01.3. Indicate what your engagement policy covers:

01.4. Provide a brief overview of your organization’s approach to engagement

USS does not have a separate engagement policy. Our approach to engagement is outlined in our Global Stewardship Principles, UK Voting and Engagement Policy and our UK Stewardship Code Statement (the web links to these documents are provided below).  Information on our approach to responsible investment is explained on our web-site.

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

USS was assessed as a Tier 1 (top tier) signatory of the UK Stewardship Code in a review by the Financial Reporting Council (FRC) which considered the quality of reporting against the seven principles of the Code. Tier 1 firms "provide a good quality and transparent description of their approach to stewardship and explanations of an alternative approach where necessary". See

  • https://frc.org.uk/investors/uk-stewardship-code/uk-stewardship-code-statements/asset-owners
  • https://www.frc.org.uk/News-and-Events/FRC-Press/Press/2016/November/Tiering-of-signatories-to-the-Stewardship-Code.aspx.

01.6. Additional information [optional]

The scheme first articulated its engagement approach to responsible investment (RI) in 1999. Since 2000, the scheme has employed an in-house responsible investment team (now six in number). This team works alongside the scheme's in-house portfolio managers to practice active stewardship of the scheme's assets, including engagement with companies on environmental, ethical, social and governance (ESG) matters. The scheme's UK Voting and Engagement Policy is regularly updated and was last refreshed in Q1 2017 (see SG6.1). The Global Stewardship Principles were refreshed in Q4 2016 - an extract is copied in LEA 1.5 below.

  • https://www.uss.co.uk/how-uss-invests/responsible-investment/voting
  • https://www.uss.co.uk/~/media/document-
  • libraries/uss/investments/riactivities/statementonukstewardshipcode.pdf
  • https://www.uss.co.uk/~/media/document-
  • libraries/uss/investments/riactivities/ussglobalstewardshipprinciplesoct2015.pdf
  • https://www.uss.co.uk/~/media/document libraries/uss/investments/riactivities/ukvotingpolicy2017.pdf

LEA 02. Reasoning for interaction on ESG issues

02.1. Indicate the method of engagement, giving reasons for the interaction.

Type of engagement

Reason for interaction

Individual/Internal staff engagements
          We also engage with our investee companies to improve our understanding of the challenges that a company faces which helps to inform our investment decisions.
        
Collaborative engagements
Service provider engagements

02.2. Additional information. [Optional]

We engage with companies in our portfolio to get a better understanding of the specific ESG risks they face and to get comfort that these risks are being managed effectively.  We view this as a key part of our fiduciary and stewardship responsibilities. Such engagement also provides data so that we can make better informed investment decisions – i.e. it supports integration. 

We do not usually engage via service providers because we have an in house team that engages with companies in our portfolio.  We consider this approach to be advantageous because the engagement remains aligned with the investment analysis conducted by the internal portfolio manager.  The exception is Governance for Owners Japan Engagement Coalition (JEC).  See section LEA 07.3 for further details.   


Process

Process for engagements run internally

LEA 03. Process for identifying and prioritising engagement activities

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

03.1. Indicate whether your organisation has a formal process for identifying and prioritising engagement activities carried out by internal staff.

03.2. Describe the criteria used to identify and prioritise engagement activities carried out by internal staff.

03.3. Additional information. [Optional]

USS Investment Management manages the assets of the USS Pension Scheme, so we do not have a diverse institutional client base with a diverse set of investment mandates and associated  ESG requirements to implement.   ESG’s risks differ across different industries so our engagement approach varies from industry to industry.  However, we consider that each industry in which we invest faces material ESG risks of one form or another.

The USS prioritisation framework for engagement was enhanced during the year. A spreadsheet was developed to identify portfolio companies where the scheme's active portfolio holding triggered any of the following criteria:

  • USS a top 20 shareholder
  • USS ownership above 3% issued share capital
  • Company on external collaborative engagement focus lists e.g. Climate Action 100+, Workforce Disclosure Initiative or a human rights watch list
  • Company is a focus of internal engagement with the portfolio managers
  • Company is a significant portfolio over-weight

This framework acts as guide, our approach to identifying engagement priorities is not rigid.  Each individual engagement is considered on its own merits.

We utilise lessons learned from previous ESG controversies in our engagement, both recent and more dated events.  For example Macondo, Rana Plaza and more recently 

Samarco and Wells Fargo are events that all elicited conversations with companies in our portfolio. Following Samarco we asked all the integrated mining companies in our portfolio about their tailings management processes and about what additional measures they had taken post the disaster.

Engagement has also been prompted by NGO research for example the Viscose Report produced by Changing Markets.

Whilst we are aware that corporations in some jurisdictions are more receptive to investor engagement, we are conscious of the need to encourage transparency in markets where investor engagement is less mature.   We vote at all our global holdings and send a letter explaining the rationale behind our votes to all our actively held companies, regardless of their size, index or country of incorporation.


LEA 04. Objectives for engagement activities

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

04.1. Indicate if you define specific objectives for your engagement activities.

04.2. Indicate if you monitor the actions that companies take during and following your engagements activities carried out by internal staff.

04.3. Indicate if you do any of the following to monitor and evaluate the progress of your engagement activities carried out by internal staff.

other description

          We maintain a spreadsheet which records engagement activity and objectives.  Current engagements are reviewed in weekly team meetings.
        

04.4. Additional information. [Optional]

We do not have a formal process in place for monitoring or reviewing progress against engagement objectives, but this is something that naturally happens as part of the engagement process and team meetings.   Thorough preparation is undertaken ahead of every engagement and detailed notes are taken during the meeting with conclusions and next steps.  Meeting notes are shared with fund managers (in many cases they also participate in the meeting) via our internal research system hosted on Bloomberg.    

Some engagement meetings are initiated by the companies in our portfolio, and we welcome this proactive approach.  However for these meetings we would not necessarily have a firm objective. Meetings are also arranged to further our understanding of a company’s business model and the risks they face.  As stewards we need to be comfortable with how our portfolio firms manage risks.  Our PM’s meet with companies on a regular basis to discuss strategy and many cases this naturally involves a discussion of ESG related matters.


Process for engagements conducted via collaborations

LEA 05. Process for identifying and prioritising collaborative engagement

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

05.1. Indicate whether your organisation has a formal process for identifying and prioritising collaborative engagements

05.2. Describe the criteria used to identify and prioritise collaborative engagements.

05.3. Additional information [Optional]

USS has a number of processes in place to identify collaborative engagement opportunities.  We will initiate collaborative engagement where we feel that our actions will be stronger as part of such a collaboration. 

We are active members of a range of organisations which support collaborative engagement:  the PRI, IIGCC,  CA100+ and the Transition Pathway Initiative.  Through these organisations we have engaged on issues such as climate change, palm oil, supply chain management and cyber-crime.   USS is a member of a number of Corporate Governance initiatives that provide a forum to discuss corporate governance issues,  such as the Investor Forum, ACGA, GIGN, ACSI, Corporate Governance Forum, ICGN, UK Pension Fund Forum, Eumedion, PLSA.  We also utilise research and analysis produced by other research bodies and campaign groups, with whom we generally maintain effective and mutually beneficial relationships. 

Please see SG9, SG10 and SG14 for further examples.


LEA 06. Objectives for engagement activities

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

06.1. Indicate if you define specific objectives for your engagement activities carried out collaboratively.

06.2. Indicate if you monitor the actions companies take during and following your collaborative engagements.

06.3. Indicate if you do any of the following to monitor and evaluate the progress of your collaborative engagement activities.

other description

          All of the above are undertaken informally.
        

06.4. Additional information. [Optional]

Objectives for collaborative engagements and the associated time frames are normally defined as part of the engagement by the participating investors and therefore we do not have a rigid process for doing this.  However these key factors are discussed internally prior to a decision being made about USS participation.  The level of USS participation will vary based on our exposure to the topic and companies impacted.


Process for engagements conducted with/on your behalf by service providers

LEA 07. Role in engagement process

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

07.1. Indicate if you play a role in the engagement process that your service provider conducts on your behalf.

07.2. Indicate the role(s) you play in engagements that your service provider conducts on your behalf.

07.3. Additional information. [Optional]

As noted, USS has a dedicated responsible investment team that undertakes engagement.  Our internal portfolio managers also conduct regular and comprehensive engagement with companies.  Therefore it is not necessary to use external service providers. The exception to this is the Japanese engagement consortium.  USS works with the Japan Engagement Consortium (JEC) to engage with Japanese companies on our behalf and help overcome language and cultural barriers. The portfolio managers and RI team monitor the engagement conducted by the JEC through regular contacts and reports. USS has quarterly meetings with the JEC to prioritise engagement candidates, set objectives, discuss meeting outcomes and follow up on outcomes for specific companies. We also influence JEC's priorities in discussion with other institutional investors in the collaboration. Views fed back from the JEC have helped to inform our portfolio managers' views of the companies covered. The JEC has also been a strong proponent of the market-level developments in corporate governance in Japan, working with USS to facilitate our engagement with regulatory and industry bodies in Japan. For information on the JEC see http://goinvestmentpartners.com/jec/

The JEC has engaged on the following issues on behalf of USS in 2017: supply chain management, board independence, remuneration, accountability for resource allocation, board skills, board diversity and succession planning.


LEA 08. Monitor / discuss service provider information

08.1. Do you monitor and review the outcomes of the engagement activities undertaken by your service providers on your behalf?

Please select all that apply

08.2. Additional information. [Optional]

The Japanese Engagement Consortium (JEC) is the only engagement provider that USS uses.


General processes for all three groups of engagers

LEA 09. Share insights from engagements with internal/external managers

09.1. Indicate if insights gained from your engagements are shared with your internal or external investment managers.

Type of engagement

Insights shared

Individual/Internal staff engagements

Collaborative engagements

Service provider engagements

09.2. Additional information. [Optional]

 

USS Active Equity portfolios are managed internally.  As noted, information from engagements and other ESG activities are provided to the investment team via a Bloomberg based data system, including JEC data.  The RI team also systematically discuss ESG issues with the managers directly.  

 A passive portfolio is managed externally and USS overrides the external manager's vote where we have an active position. 


LEA 10. Tracking number of engagements

10.1. Indicate if you track the number of your engagement activities.

Type of engagement
Tracking engagements

Individual / Internal staff engagements

Collaborative engagements

Service provider engagements

10.2. Additional information. [OPTIONAL]

Whilst records of company meetings are maintained, we do not systematically track the number of engagement meetings, letters or conversations we have with companies or whether the engagement was collaborative or not as we do not consider counting the number of engagements to be a good measure of the quality of engagement.

However, we can estimate for 2017, that USS sent approximately 250 engagement letters to 240 companies. The RI team also held engagement meetings with 40 companies during the year and conducted research on 44 additional companies.

Additionally, RI posted 137 research and meeting notes on the Internal Research Home page on Bloomberg which is available for all our portfolio managers. (We have not sought to count the meeting notes added by the portfolio manager's themselves, which would run into thousands).

USS participates in industry events and collaborative meetings convened by many of the collaborative initiatives listed in SG09 throughout the year.  USS does not only engage with companies in the UK, we engage with companies internationally: 

  • USS participated in collaborative engagement meetings with BHP and Vale regarding the Samarco tailings dam disaster.  
  • In November 2017, a member of RI team spoke at the ACGA's annual conference (at a UBS event) held in Mumbai and participated in a delegation facilitated by ACGA which met with Indian regulators and companies. In May 2017, a member of the RI team chaired a panel at the RI Asia Conference, held in Tokyo, and participated in meetings with companies and regulators.
  • USS also participated in an ACGA study trip to China, where we engaged with companies and regulators on ESG issues. 
  • USS participated in a fact finding trip to Japan to discuss ESG issues with a large Japanese conglomerate operating in the apparel and textile industries.

See other examples in LEA 24.


Outputs and outcomes

LEA 11. Number of companies engaged with, intensity of engagement and effort

11.1. Indicate the amount of your listed equities portfolio with which your organisation engaged during the reporting year.

Number of companies engaged

(avoid double counting, see explanatory notes)

Proportion (to the nearest 5%)
Specify the basis on which this percentage is calculated

Individual / Internal staff engagements

9999 Number of companies engaged
0 Proportion (to the nearest 5%)

Specify the basis on which this percentage is calculated

Collaborative engagements

9999
0 Proportion (to the nearest 5%)

Specify the basis on which this percentage is calculated

Service provider engagements

9999
0 Proportion (to the nearest 5%)

Specify the basis on which this percentage is calculated

11.2. Indicate the proportion of engagements that involved multiple, substantive and detailed discussions or interactions with a company during the reporting year relating to ESG issue.

Type of engagement

% Comprehensive engagements

 

 

Individual / Internal staff engagements

 

 

Collaborative engagements

 

 

Service provider engagements

11.3. Indicate the percentage of your collaborative engagements for which you were a leading organisation during the reporting year.

Type of engagement

% Leading role

  Collaborative engagements

11.4. Indicate the percentage of your service provider engagements that you had some involvement in during the reporting year.

Type of engagement

% of engagements with some involvement
  Service provider engagements

11.5. Additional information. [Optional]

Please note that 9999 was entered into the boxes above as we were unable to enter NA.

We do not consider the number of company engagements to be an appropriate indicator of the quality of engagement. As a result we have no reason to collect those statistics.

USS manages the majority of its assets in house. Given the concentrated and active  nature of USS’s public equity portfolio, the proportion of companies we engage with will be higher than for typical pension funds which tend to have very large passive exposures. 

With regard to question LEA 11.3, whilst USS will regularly participate or lead on collaborative engagements e.g. with other peer international pension funds, we do not track the exact number or wish to report on it.

Please see our comments in LEA 10.2 (and many other sections in the PRI report) for examples of USS's stewardship activities in public equities and other asset classes.


LEA 12. Engagement methods

12.1. Indicate which of the following your engagement involved.

12.2. Additional information. [Optional]

We do not maintain statistics on the type of engagement undertaken.  However, we have participated in all of the engagement types described above and recognise the contribution that each approach can make. 


LEA 13. Companies changing practices / behaviour following engagement

13.1. Indicate whether you track the number of cases during the reporting year in which a company changed its practices, or made a formal commitment to do so, following your organisation’s and/or your service provider's engagement activities.

Do you track number of companies that changed or made a formal commitment to change in the reporting year following your organisation’s and/or your service provider's engagement activities?

13.2. Indicate the number of companies that changed or made a formal commitment to change in the reporting year following your organisation’s and/or your service provider's engagement activities.

Number of companies
% of total portfolio

Individual / Internal staff engagements

999
100 % of total Portfolio

Collaborative engagements

999
100 % of total Portfolio

Service provider engagements

999
100 % of total Portfolio

13.3. Additional information [Optional].

Whilst we track the number of company responses to our engagements and changes in corporate behaviour and disclosure, as noted we do not maintain statistics around engagement responses.


LEA 14. Examples of ESG engagements

14.1. Provide examples of the engagements that your organisation or your service provider carried out during the reporting year.

ESG factors
ESG issue
          Shareholder Rights
        
Conducted by
Objectives

To encourage the company to engage with a potential suitor over a proposed bid.

Scope and Process

USS, presented at Enterprise Chambers Court, proposed Supervisory Board candidate, participated in a joint delegation to the Finance Ministry.  USS also made public statement at both an AGM and an EGM. Meetings with the company were attended by a representative the RI Team and fund manager from the relevant desk.  Whilst this was an individual investment collaboration with other investors took place during the process.

Outcomes

The Board has been refreshed.  The importance of shareholder engagement is now acknowledged by the firm. A debate around shareholder rights in the Netherlands has also been opened up.  USS decided to remain invested and enter into a dialogue with the firm rather than divest.  

ESG factors
ESG issue
          Health & Safety and Impact on the Environment
        
Conducted by
Objectives

To understand the potential financial costs associated with the disaster and to get comfort that the company is delivering on the remediation work promised and that this work is beneficial to effected stakeholders in the locality.   It was also important to get comfort that the company had reviewed its processes and controls around tailings management and made enhancements where appropriate.

Scope and Process

Field trip to site of accident to speak to company representatives on the ground as well as impacted stakeholders including local communities.  Also to review progress of remediation work and future plans.   

Outcomes

Comfortable that the company is taking responsibilities seriously.  Company agreed to change governance committee overseeing remediation projects to ensure greater company representation of stakeholders.

ESG factors
ESG issue
          Health & Safety performance.
        
Conducted by
Objectives

To communicate to the firm our concerns around the number of fatalities they are experiencing and to understand why performance does not appear to be improving despite investment in processes and controls.  Ultimately USS wants to see far fewer accidents and far fewer fatalities.

Scope and Process

Focused engagement call specifically discussing Health & Safety performance to illustrate the significance of this issue to us as investors and to speak directly to those responsible for managing Health & Safety at the firm (IR, H&S Officer and Sustainability team).     The portfolio manager also played a full role in the call which helped to emphasise the financial materiality of the issue.   We also raised concerns in the engagement letter we sent to the Chairman after the AGM. 

Outcomes

Whilst it was evident that the firm had made significant efforts to improve their health and safety performance.   We had some residual concerns around the different health & safety performance of the company in different countries.

Significant improvement in health & safety performance was reported in the 2017 sustainability report. this year.  Which suggests that the company's efforts are paying dividends but there is still more work to be done.

ESG factors
ESG issue
          Transition to a lower carbon economy and impact on electrical utilities.
        
Conducted by
Objectives

The company is a heavy user of coal in its power generation.  USS needed to understand how the company was assessing the risk of stranded assets and the transition to a lower carbon economy.

Scope and Process

Company visit to Japan with other investors and one to one meeting with the company in the UK with the portfolio manager present.

Outcomes

The company did not have a position on climate change beyond 2030.   For a variety of reasons (including concerns around climate change risk) the position was sold. 

ESG factors
ESG issue
          Board Structure and audit tenure
        
Conducted by
Objectives

To convey to the firm our concerns around corporate governance, human capital management and commitments to change.

Scope and Process

Direct engagement with the company with portfolio manager and RI team in attendance

Outcomes

Some additional disclosure but no substantive change.  A collaborative engagement has now been organised by the Investor Forum.

ESG factors
ESG issue
          Remuneration of executive directors
        
Conducted by
Objectives

Influence structure and metrics to align executives' reward to the creation of shareholder value,  to the extent possible given regulatory restrictions in the banking sector

Scope and Process

Several face to face meetings over six months with Chair of the Remuneration Committee and relevant executives; several email / phone call exchanges

Outcomes

Company put a revised remuneration proposal to its AGM in 2017.

ESG factors
ESG issue
          Supply Chain Management
        
Conducted by
Objectives

To understand

  • The company's exposure to viscose in their supply chain
  • The environmental and social risks associated with un-sustainable viscose production. 
  • The potential supply chain impact if viscose supply was disrupted.  
Scope and Process

Research followed by face to face meeting with the firm.

Outcomes

Most of the company's efforts have focused on sustainable cotton which is much more of a potential issue.

The company's exposure to viscose was limited and therefore the risk of supply chain disruption was manageable.  

The company has started to collaborate with the Sustainable Apparel Coalition. Whilst the company has mapped its viscose supply chain, it has not gone beyond tier 1, so efforts in this area are less mature with more scope for development.  We will continue the dialogue on viscose in 2018 when more progress has been made.

14.2. Additional information. [Optional]

Further details relating to the Akzo Nobel shareholder resolution (example 1) can be found by following the link below.

  • https://www.akzonobel.com/for-media/media-releases-and-features/akzonobel-announces-changes-supervisory-board

USS holds the view that not all engagements need to be face to face meetings or have specific deliverables.  We can exert our influence as stewards in a number of ways.  For example, where we have voted against or abstained on resolutions at a shareholder meeting, or where we note areas that are not aligned to our corporate governance policies, we communicate our concerns via a letter to the company Chairman after the vote.  Where appropriate we include comments in this letter about the company’s ESG disclosure and performance,  requesting greater disclosure where necessary.   We also ask questions regarding ESG matters via e-mail.  We consider that we can reach more companies if we adopt this lighter approach with some engagements.  This is particularly true in some of the emerging markets in which USS invests where stakeholder engagement is less developed.  Asking an ESG related question can send a message to companies about the materiality of ESG matters to investors and supports the mandate of sustainability teams within these businesses.


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