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Universities Superannuation Scheme - USS

PRI reporting framework 2018

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You are in Indirect – Manager Selection, Appointment and Monitoring » Selection

Selection

SAM 02. Selection processes (LE and FI)

02.1. Indicate what RI-related information your organisation typically covers in the majority of selection documentation for your external managers

Your organisation’s investment strategy and how ESG objectives relate to it

ESG incorporation requirements

ESG reporting requirements

Other

No RI information covered in the selection documentation

LE

FI - SSA
FI - Corporate (financial)
FI - Corporate (non-financial)
Private equity
Property
Investment strategy and how ESG objectives relate to it
ESG incorporation requirements
ESG reporting requirements
Other
No RI information covered in the RFPs

If you select any 'Other' option(s), specify

USS has a team dedicated to the selection, appointment and oversight of external asset managers for public assets (the StratCo team) who work closely with the RI Team and other functions at USS Investment Management to deliver the most appropriate fund management options for each external mandate.  

In addition to documentation, the StratCo team and RI team meet with managers to discuss their approaches to investment strategy, ESG integration, stewardship and other RI practices. In addition to materials provided by the fund manager, the RI team will also consider third party research and conduct its own desk-based research and diligence, leveraging the experience and knowledge of the in-house team.

We usually ask the fund manager for a copy of their internal PRI report; and information on how the manager undertakes stewardship and engagement activities. We use reporting in-line with the guidance from Responsible Investment Reporting in Public Equities document: See http://www.sustainablefinance.ch/upload/cms/user/2015_01_26_guide_to_responsible_investment_reporting_in_public_equity_published_NAPF1.pdf.  USS were one of the asset owners responsible for the development of this guidance. 

We also include RI considerations in the appointment of hedge fund managers.  

USS does not typically use RFPs.

 

02.2. Explain how your organisation evaluates the investment manager’s ability to align between your investment strategy and their investment approach

Strategy

Assess the time horizon of the investment manager’s offering vs. your/beneficiaries’ requirements

Assess the quality of investment policy and its references to ESG

Assess the investment approach and how ESG objectives are implemented in the investment process

Review the manager’s firm-level vs. product-level approach to RI

Assess the ESG definitions to be used

Other

None of the above

LE

FI - SSA
FI - Corporate (financial)?
FI - Corporate (non-financial)
Private equity
Property
Assess the time horizon of the investment manager’s offering vs. your/beneficiaries’ requirements
Assess the quality of investment policy and its reference to ESG
Assess the investment approach and how ESG objectives are implemented in the investment process
Review the manager’s firm-level vs. product-level approach to RI
Assess the ESG definitions to be used
Other
None of the above

ESG people/oversight

Assess ESG expertise of investment teams

Review the oversight and responsibilities of ESG implementation

Review how ESG implementation is incentivised

Review the manager’s RI-promotion efforts and engagement with the industry

Other

None of the above

LE

FI - SSA
FI - Corporate (financial)?
FI - Corporate (non-financial)?
Private equity
Property
Assess ESG expertise of investment teams
Review the oversight and responsibilities of ESG implementation
Review how is ESG implementation enforced /ensured
Review the manager’s RI-promotion efforts and engagement with the industry
Other
None of the above

Process/portfolio construction/investment valuation

Review the process for ensuring the quality of the ESG data used

Review and agree the use of ESG data in the investment decision making process

Review and agree the impact of ESG analysis on investment decisions

Review and agree ESG objectives (e.g. risk reduction, return seeking, real-world impact)

Review and agree manager’s ESG risk framework

Review and agree ESG risk limits at athe portfolio level (portfolio construction) and other ESG objectives

Review how ESG materiality is evaluated by the manager

Review process for defining and communicating on ESG incidents

Review and agree ESG reporting frequency and detail

Other, specify

None of the above

LE

FI - SSA
FI - Corporate (financial)?
FI - Corporate (non-financial)?
Private equity
Property
Review the process for ensuring the quality of the ESG data used
Review and agree the use of ESG data in the investment decision making process
Review and agree the impact of ESG analysis on investment decisions
Review and agree ESG objectives (e.g. risk reduction, return seeking, real-world impact)
Review and agree manager’s ESG risk framework
Review and agree ESG risk limits at athe portfolio level (portfolio construction) and other ESG objectives
Review how ESG materiality is evaluated by the manager
Review process for defining and communicating on ESG incidents
Review and agree ESG reporting frequency and detail
Other, specify
None of the above

If you select any 'Other' option(s), specify

USS specific reporting

Product level information is very important to USS. The scheme invests in particular funds for particular mandates, and not the whole manager. We therefore seek to ensure that RI discussions and reporting are focused on the scheme's potential or invested assets. There is no point us reviewing materials relating to developed market equities, when we are looking to invest in emerging markets, fixed income or property if the RI approach and processes do not apply to these asset classes (which is what we have experienced!). 

Property specific reporting

USS is encouraged when any property fund it invests in can provide evidence that it considers ESG matters within its own investment and asset management process.  Participation in GRESB is an important signal of this intent, and is considered by us to be an essential requirement.  Post acquisition we would encourage each year an improvement in GRESB performance.

Private equity reporting

USS is a signatory to the Montreal Pledge and has declared our intention to report in line with the TCFD recommendations. We have been highlighting the need, and encouraging our GP’s, to collect data to enable LPs to carbon footprint their private equity fund portfolios for several years.

 

02.3. Indicate the selection process and its ESG/RI components

02.4. When selecting external managers does your organisation set any of the following:

ESG performance development targets

ESG score

ESG weight

Real economy influence

Other RI considerations

None of the above

LE

FI - SSA
FI - Corporate (financial)?
FI - Corporate (non-financial)?
Private equity
Property
ESG performance development targets
ESG score
ESG weight
Real world economy targets
Other RI considerations
None of the above

If you select any 'Other' option(s), specify

Private Equity

The scheme has developed its own approach to enhanced due diligence for private equity. The approach is  published on our website here: https://www.uss.co.uk/~/media/document-libraries/uss/investments/riactivities/eddmar2014.pdf?la=en. 

All new GPs and fund teams are asked to complete a questionnaire regarding their approach to environmental, social and governance (ESG) matters, due diligence, disclosure on responsible investment and participation in industry initiatives relating to private equity and ESG. The questionnaire is outlined in SAM 02.05 below. It closely aligns to ESG matters raised in PRI LP questionnaire. USS participated in the PRI working group which helped to develop the PRI LP due diligence questionnaire, published in 2015. 

Property and Infrastructure

For property we take aspects of both the private and public market processes, as appropriate to the mandate. Were we to make infrastructure fund appointments in future, RI questions would be raised as part of the due diligence process, akin with our approach to other manager appointment processes.

Hedge Funds

We have focused on governance at hedge funds. We undertake due diligence on the directors and articulate our governance expectations publicly here: https://www.uss.co.uk/~/media/document-libraries/uss/investments/riactivities/expectationsgovernancehedgefunds2010.pdf?la=en.

Public equity / fixed income

The process is outlined in SAM 01. 

02.5. Describe how the ESG information reviewed and discussed affects the selection decision making process.[OPTIONAL]

          USS PE RI diligence process

The first step in the process for USS occurs during the scheme’s due diligence assessments of potential GPs.  Private equity is not just buyouts, where the private equity firm takes control of a company. The LP/GP structure is used for a range of asset types including, among others, debt, infrastructure and mortgages. As a result, while the process USS has developed for undertaking due diligence has some core aspects, it has to be flexible and adaptable to account for differences in the underlying assets. 
 
USS undertakes its own traditional due diligence into GPs and once a prospective fund has passed an initial evaluation, a more detailed assessment is undertaken by the internal private equity managers. As part of that process, and before the investment decision is made, the RI due diligence is undertaken. This process is relatively simple, involving a brief questionnaire followed by either a meeting or teleconference between the GP, internal private equity staff and the USS RI team.
 
USS has developed its own questionnaire (see below), which is sent to all potential GPs. This questionnaire focuses on the following four areas:
1.     How RI issues are considered at the due diligence stage.
2.     How extra financial issues are managed in the overall management of assets.
3.     Communications associated with ESG issues.
4.     Views on UN-supported Principles for Responsible Investment (PRI) and other ESG frameworks.
 
The aim of these questions is twofold:
1.     To ensure the GP is aware that USS is interested in how it manages these issues and is prepared to answer questions around them.
2.     To identify areas for further discussion during the second phase of the due diligence (that is, a teleconference or meeting).
 
It is now unusual not to receive written responses to these questions and it is rare for USS not to receive at least basic information from potential GPs. Indeed, many funds now also provide additional information, including ESG policies and case studies as to how ESG issues have been incorporated into investment processes. USS is also seeing increased inclusion of ESG information in private placement memoranda (PPMs) – the reports that GPs provide to potential investors as part of the marketing process. While this frequently provides very limited information, it does indicate that the private equity sector is becoming both more used to seeing requests for information on ESG issues and more proactive in providing it. Inclusion of such information, in DQMs for example, demonstrates how far the sector has moved in recent years.  
 
The second phase of the process – the follow-up call or meeting – is extremely important. During these calls or meetings, USS asks for more detailed explanations as to how extra financial issues are assessed in the due diligence process, how they are managed across portfolios and how these issues are then communicated with LPs and other stakeholders.
 
In order to prepare for these meetings, USS reviews previous investments made by the GP to identify where ESG issues may have arisen in a portfolio company or asset. This generates specific questions that will usually be sent to the GP in advance of the call to enable them to prepare responses and to ensure that the appropriate people are available during the call to respond to the questions. The due diligence process then drills down to how the potential GP assessed those risks in their due diligence and managed them post investment. If it is a new fund (that is, a first-time fund or new GP), USS will even look back to a potential manager’s investments at previous funds to identify appropriate detailed ESG questions. 
 
Finally, USS – as a strong supporter of the UN-supported PRI – asks GPs for their views around the PRI as a framework for addressing these issues. USS does not require its GPs to be signatories to PRI, but does expect potential GPs to have processes in place to assess and address ESG risks and opportunities. USS does, however, encourage GPs to sign up to the PRI and a number of USS’s GPs have become signatories to the Principles. In fact, the PRI already has a disproportionate number of private equity-focused funds as signatories at about 15 percent of its membership (this is higher than the average asset allocations to the sector by pension funds).   
 
Based on the outcomes of these calls/meetings, responses to the questionnaire and other materials provided by the GP, the RI team provides a written opinion on the level of RI activity within the fund. This opinion is then discussed with USS’s internal Private Equity team to identify any outstanding ESG risks concerns. This report includes, where relevant, the identification of issues for further engagement if USS decides to invest in the fund. This final opinion is then incorporated into a final report on the fund (a deal qualifying memorandum or DQM) and submitted to an internal Private Markets Investment Committee (PMIC), which takes the final decision on investment in a GP.

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Private Equity Questionnaire for new GP's and new funds

USS’s Approach to Responsible Investment
The Universities Superannuation Scheme Ltd (USS) is one of the largest pension schemes in the UK.  USS is a long term and responsible investor, and takes seriously its fiduciary obligations to its members and beneficiaries. 

In fulfilling these obligations, USS takes account of short and long term value drivers in its investment process. Environmental, social and governance (ESG) factors are considered in conjunction with financial information. In particular, we believe investee companies’ corporate governance, reputation management, environmental risk exposure, and human resource management should be evaluated as part of an assessment of a company’s competitive positioning and long term profitability. The scheme also seeks to actively encourage responsible corporate behaviour, which is based upon the belief that:  

i)	management of such issues is good for long term corporate performance, and 
ii)	better management of these issues will protect and enhance the value of the Scheme's investments. 

Our approach aims to ensure long term value delivery for our pension fund beneficiaries. 

Implications for Managers
USS expects that its fund managers, both internal and external, will take account of potentially material corporate governance, social and environmental considerations in the selection, retention and realisation of scheme investments. In addition, where the manager owns the assets or company, USS expects the manager to ensure that the above issues are managed to reduce risks, identify opportunities and to protect the reputation of USS.  

Questions for Managers
•	Please describe how your due diligence process incorporates an assessment of environmental, social and governance risks in the assets you are examining.  
•	Please identify the main environmental, social and corporate governance risks both your firm and investee portfolio assets face, and explain how these risks are managed. Please provide examples.

USS is facing increasing demand from members, trustees and investment staff for transparency and disclosure of ESG information. USS is supportive of greater transparency to both LPs and other stakeholders by private equity firms and investee companies. The scheme expects its GPs and their portfolio companies to work towards best practice reporting, and industry standards where applicable, such as the Walker Guidelines (http://www.walker-gmg.co.uk/) in the UK. 

•	Please explain your policy on reporting and disclosure pertaining to your own operations and those of investee companies, and provide supporting material.

USS is a signatory to the UN Principles of Responsible Investment (http://www.unpri.org).  These commit signatories (currently representing some US$60+ trillion in assets) to six aspirational Principles that help guide responsible investment strategy in all asset classes.  Building on the UN PRI, the American Investment Council (AIC - see www.investmentcouncil.org) published its own Responsible Investment Guidelines in February 2009, and Invest Europe’s Professional Standards Handbook also provides guidance on the integration of ESG into investment decision making and portfolio management.

•	Please outline your views on the UN PRI, AIC Guidelines, Invest Europe professional standards and other industry best practice codes. Please outline where you are signatories to such initiatives and provide examples of your commitments. 

For further information please contact RI@uss.co.uk.
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RI monitoring for private markets
Post investment, USS Investment Management’s in-house staff undertake monitoring of the GPs to which the scheme has allocated capital. The scheme undertakes monitoring to seek assurance that ESG issues are being managed by its GPs and to encourage improvements in ESG performance.  The information collected during monitoring also helps inform USS’s future allocations to a private equity manager as data collected are used in the due diligence process for new funds (as outlined above).  

The process of RI monitoring begins with research into the portfolio companies or other assets in which a GP has invested. The research identifies relevant ESG risks or opportunities that can be interrogated further with the GP and seeks to understand how they have engaged with portfolio companies on these issues.  A member of the RI team meets with representative members of the GP and questions the processes, actions and outcomes associated with the management of ESG issues within the portfolio. USS carries out these assessments within the context of the LP / GP relationship, where the GP has ultimate responsibility for investment decisions and its portfolios.  As a result, USS is not involved in managing issues at a portfolio or asset level. 

USS aims to assess their GPs on ESG issues on a regular and ongoing basis (typically every three years). This is irrespective of the type of private equity fund in which USS is investing (for example, debt funds or buyouts). It may also be the case that due diligence is undertaken on new funds offered by the private equity manager during this time. USS would assess how RI has been incorporated in any previous investments: this process also acts as a post investment review.

To aid with due diligence and ongoing assessments, USS has developed an internal databank of questions on ESG topics to ensure that the effectiveness of meetings with GPs is maximized covering the broad range of ESG issues. 
-----------------------

Re Public Markets Passive funds
Note on Passive Investment Strategies: For our passive equity portfolio, USS expects the fund manager to adhere to principles of good stewardship and to take an active approach to voting and engagement: the scheme monitors the manager to ensure that this is the case. USS does not consider this to be integration and has not looked at monitoring for ESG integration at its passive equity fund manager. However, it could be argued that the monitoring of ESG risk, active decision making on voting, and engagement on ESG matters within a portfolio would be considered "ESG integration" by some.
        

SAM 03. Evaluating engagement and voting practices in manager selection (listed equity/fixed income)

03.1. Indicate how your organisation typically evaluates the manager’s active ownership practices in the majority of the manager selection process.

Engagement

Review the manager’s engagement policy 1

Review the manager’s engagement process (with examples and outcomes)

Ensure whether engagement outcomes feed back into the investment decision-making process

Other engagement issues in your selection process specify

None of the above

LE

FI - SSA
FI - Corporate (financial)
FI - Corporate (non-financial)
Review the manager’s engagement policy
Review the manager’s engagement process (with examples and outcomes)
Ensure that engagement outcomes feed back into the investment decision-making process
Other engagement issues in your selection process specify
None of the above

If you select any 'Other' option(s), specify

We also review Stewardship Code statements and assessments, and request the fund manager's internal PRI transparency reports. We look to review and discuss case studies.  

The RI team usually meet with the portfolio managers and RI/ ESG teams at external managers (where they exist) to have a more informed discussion. We do not rely on responses from investor relations or client reps alone as they do not tend to have sufficient in-depth knowledge. Similarly, we do not rely on consultant research into fund manager's ESG performance. 

USS's approach to stewardship extends to all the scheme's assets including externally managed and non-equity assets.  We also consider engagement for our private market managers with their portfolio assets - be it portfolio companies, or for property tenants and property managers. Questions regarding stakeholder engagement are included in the GRESB Questionnaire which our property managers (of which we have a small number) and direct infrastructure assets are asked to complete.

 

(Proxy) voting

Review the manager’s voting policy

Review the manager’s ability to align voting activities with clients’ specific voting policies

Review the manager’s process for informing clients about voting decisions

Ensure whether voting outcomes feed back into the investment decision-making process

Review the number of votes cast as a percentage of ballots/AGMs or holdings and available rationale

Other voting issues in your selection process; specify

None of the above

LE

Review the manager’s voting policy
Review the manager’s ability to align voting activities with clients’ specific voting policies
Review the manager’s process for informing clients about voting decisions
Ensure that voting outcomes feed back into the investment decision-making process
Review the number of votes cast as a percentage of ballots/AGMs or holdings and available rationale
Other active ownership voting issues in your selection process; specify
None of the above

If you select any 'Other' option(s), specify

We review asset managers' voting data, stewardship code response(s) and consider consistency of voting records between different markets and the corporations public policy positioning.

We consider the manager's public statements and participation in collaborative fora, particularly those focused on corporate governance and shareholder rights.

We consider the manager's approach to voting disclosure in the market, and how or whether they communicate voting decisions to their portfolio companies, in line with good practice.

We request voting data in a raw format so that we are able to analyse key areas and compare it to our in-house voting records. This enables us to drill down to interrogate specific voting issues.  

We also review their approach to stock lending, management of conflicts of interest (both between clients and between asset classes - e.g. public equity and fixed income), vote confirmation processes and request the opportunity to direct voting for pooled fund holdings.

03.2. Describe how you assess if the manager’s engagement approach is effective.

03.3. Describe how you assess if the manager’s voting approach is effective/appropriate

          As outlined above we consider consistency of voting records with public policy positions, between different markets, and engagement activities. We ask about vote confirmations and votes chains; the management of stock lending practices, communicating vote decisions to companies and public reporting.
        

03.4. Additional information [OPTIONAL]

          Further RI review areas for listed equities are detailed in the Guide to Responsible Investment Reporting in Listed Equities document which we helped to produce in 2015 -
http://www.sustainablefinance.ch/upload/cms/user/2015_01_26_guide_to_responsible_investment_reporting_in_public_equity_published_NAPF1.pdf.

USS is currently working (March 2018) with the PRI Private Equity Disclosures Working Group and ERM to produce Private Equity Reporting and Monitoring Guidance.  

A Co-Head of RI sits on PRI's Private Equity Advisory Committee and has presented to GPs at various international fora on USS's approach to ESG due diligence, monitoring and reporting expectations on many occasions over the past few years.
        

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