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National Employment Savings Trust (NEST)

PRI reporting framework 2020

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

Outputs and outcomes

SAM 08. Percentage of externally managed assets managed by PRI signatories (Private)


SAM 09. Examples of ESG issues in selection, appointment and monitoring processes

09.1. Provide examples of how ESG issues have been addressed in the manager selection, appointment and/or monitoring process for your organisation during the reporting year.

Topic or issue
          Manager selection for Infrastructure Debt
        
Conducted by
Asset class
Scope and process

In our request for proposals we questioned fund managers on their ability to assess ESG risk at the due diligence stage and their approach to monitoring and addressing ESG issues that develop after investment. We also wanted to understand the opportunities they’re seeing in renewable energy and social infrastructure. We looked for examples of how ESG risk analysis was delivered in all stages of the investment process. This included data sources, personnel and engagement with the management of the entities looking to finance their activities through the issuance of private debt. We asked how climate related risks and opportunities were managed, including physical climate risks. For example, whether the fund manager had factored in excessively high temperatures and the higher likelihood of wildfires in a particular region when considering making a loan to finance a hotel chain, and how these risks might affect the borrower’s ability to repay its debt if tourism should fall. Political and regulatory risk are also key considerations. If a fund manager was unable to demonstrate a good understanding and management of these issues, it was reflected in their final selection score.

Outcomes

We appointed BlackRock for our infrastructure debt mandate. Their consideration of ESG was a well articulated component of their investment strategy. Risks are considered throughout their investment process, with a risk screen conducted at the beginning of the due diligence stage. For example, their initial risk screen of a loan to a hospital identified potentially corrupt procurement practices. Following discussion with BlackRock’s risk and financial crime teams, the investment team declined on the opportunity. BlackRock works with several external due diligence providers to identify and manage these often complex and technical risks, including engineering, environmental and energy management consultants. If material ESG risks are identified during the initial underwriting and investment phase, the team seeks to mitigate these through: requesting changes to the design or operation of the project or negotiating enhanced covenants in respect of ESG standards of operation, as well as additional reporting covenants in respect of the identified risks.

Our strategy aims to invest approximately 50 per cent of assets in infrastructure debt in positive impact sectors like social housing, health facilities and renewable energy including wind, solar projects and smart meter providers. BlackRock have developed metrics to measure the impact of financing these assets.

Topic or issue
          Removing tobacco from portfolios
        
Conducted by
Asset class
Scope and process

Following our 2018 case study on the tobacco industry, we’ve decided to remove tobacco investments across all our portfolios. Our research indicates that the tobacco industry has a bleak financial future and is likely to be unsustainable. Tobacco companies face increased regulation and litigation by governments around the world, which impacts consumer demand, sales and profits. The industry’s ESG profile is inconsistent with our principles. This was the catalyst for examining its financial sustainability.

We’ve already started the process of removing exposure from our portfolios. Our goal is to reduce holdings in companies whose main income comes from the manufacture and production of tobacco from 0.4 per cent of total assets today to zero. The majority of our mandates are already tobacco free and any new mandates must be tobacco free to pass our selection criteria.

Outcomes

The majority of our mandates are already tobacco free and any new mandates must be tobacco free to pass our selection criteria. Where tobacco is held within existing mandates, we will assess our options with fund managers and investigate the most straightforward and cost-effective ways of removing these. We aim to be tobacco free by summer 2021 at the latest. We believe this will help us improve longer term outcomes for all our members.

09.2. Additional information.


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