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Universities Superannuation Scheme - USS

PRI reporting framework 2018

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Outputs and outcomes

PE 14. ESG issues affected financial/ESG performance

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

14.1. Indicate whether your organisation measures how your approach to responsible investment in Private Equity investments has affected financial and/or ESG performance.

14.2. Describe how you are able to determine these outcomes.


PE 15. Examples of ESG issues that affected your PE investments

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

15.1. Provide examples of ESG issues that you identified in your potential and/or existing private equity investments during the reporting year.

Investment Stage
ESG issues

ESG issues

          Child safety
        
Sector(s)
          Education co-investment
        
Impact (or potential impact) on the investment

Poor checking / screening of staff could expose students to unacceptable risks. Such risk could impact corporate reputation and limit student numbers, contracts, regulatory approvals etc.

USS sought to understand the processes in place to manage the above risks and performance to date, to understand the measures the company took to ensure student safety, regulatory compliance and protect the business's reputation and future revenues.

Activities undertaken to influence the investment and its response

Details were provided regarding employee and contractor checks, training, reporting and board oversight on this matter.

Due diligence did not raise any concerns.

Investment Stage
ESG issues

ESG issues

          Contaminated land
        
Sector(s)
          Oil and gas assets
        
Impact (or potential impact) on investment

Decommissioning liabilities explored as contaminated land identified in the portfolio - clean up costs would impact the valuation.

Activities undertaken to influence the investment and its response

Clarifications sought regarding potential indemnities from the seller and to understand the likely remediation costs and timescales.

Findings were factored into the valuations and analysis undertaken by the deal teams.

Investment Stage
ESG issues

ESG issues

          Electric and autonomous vehicles
        
Sector(s)
          Motorway services direct investment
        
Impact (or potential impact) on investment

USS met with one of the scheme's directly held assets to discuss ESG issues pertaining to the investment.

They sought to understand the potential impacts to the business model, and how the firm was looking to adapt to take account of the increase in electric vehicles and autonomous vehicles.

 

Activities undertaken to influence the investment and its response

The company is reviewing the implications of changing transport systems on their business for the long-term with the board, including USS's directors, involved in the discussions.

Investment Stage
ESG issues

ESG issues

          Stranded assets and carbon price modelling
        
Sector(s)
          Oil and gas co-invest
        
Impact (or potential impact) on investment

USS considered how climate change regulations could impact on a potential oil and gas investment. Regulatory impacts, particularly carbon taxation, could cause assets to become stranded in the ground impacting valuations and returns. 

Political uncertainty or increases in cost of carbon could reduce the exit valuation or cause delays for realisation of the investment.
 

Activities undertaken to influence the investment and its response

The deal team undertook extensive research to take a view on the regulatory risks around climate change. 

They developed modelling for a blended carbon tax assumption to calculate the potential impacts on returns under differing carbon price scenarios. 

The deal was of short duration and the assets were predominantly gas, which has a lower risk of stranding than oil. These factors were fed into the decision making process for the deal.

 

Investment Stage
ESG issues

ESG issues

          Internal controls
        
Sector(s)
          Manufacturing - co-investment opportunity
        
Impact (or potential impact) on investment

Concerns were raised regarding product integrity and internal controls. The company operated in countries where bribery and corruption risk was greater; and compliance culture was weaker.

Poor internal controls and bribery and corruption risk management could affect the integrity of contracts, product safety, reliability of the accounts and the potential for future mis-statements and scandal.

Activities undertaken to influence the investment and its response

Due diligence on the company's internal controls and management of bribery and corruption risk would have been a key focus for the deal team. However, the deal was abandoned (mainly due to other reasons) before detailed due diligence was undertaken/ commissioned.

15.2. Describe how you define and evaluate the materiality of ESG factors.

At USS our duty is to protect and enhance the value of our investments over the long-term, with the ultimate aim of providing secure pensions for our members. This means we need to consider all long-term risks to the performance of our investments, including material environmental, ethical, social and corporate governance (ESG) factors where these have a financial bearing. Examples of ESG matters routinely considered by the fund are outlined under the RI Approach page on the fund's website - see https://www.uss.co.uk/how-uss-invests/responsible-investment/approach.

USS employs an experienced in-house RI team to help identify and review ESG risks and materiality on a deal by deal basis. The scheme commits resources to ensuring that the team has access to research and tools to implement RI, and is committed to continuous professional development through participation in industry initiatives and events and training. Through this process, ESG risks, their materiality and the mitigants in place to manage these risks are outlined ahead of each deal, and feed into the investment decisions taken by the Private Markets Investment Committee.

In addition, where external specialist environmental etc. consultants are used in the ESG due diligence process, we will usually request that they provide monetary values on issues they identify.  This ensure that those which hit a certain materially threshold are included with other financially material issues in future management planning. 


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