Stewardship Report 2021 - The Universities Superannuation Scheme (USS)
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USS Stewardship Report 2021 1 The Universities Superannuation Scheme (USS) Stewardship Report 2021
2 USS Stewardship Report 2021 This document is issued by Universities Superannuation Scheme Limited (in its capacity as the sole corporate trustee of the Universities Superannuation Scheme) / USS Investment Management Limited. This document may make reference to specific entities and other constructs within the USS Group. Set out below is a summary of what we mean: • Universities Superannuation Scheme (the Scheme) – a trust-based workplace pension scheme governed by a trust deed and rules. • Universities Superannuation Scheme Limited (the Trustee) – the trustee of the Scheme. The trustee makes sure the Scheme, which is set up for the benefit of our members and their dependants, is run in line with the trust deed and rules and legal duties. • USS Investment Management Limited (USSIM) – a subsidiary of the Trustee. It looks after the investment and management of the Scheme’s assets. However, for simplicity and to aid readability, this document may also make use of terms such as Universities Superannuation Scheme, USS, we, us, our and similar, as a way of collectively referring to entities and/or other constructs within the USS Group – rather than referring to a specific entity and/or other construct. Whilst this document may make use of forms of collective reference, each entity or other construct has a distinct role within the USS Group, and the use of forms of collective reference and simplification within this document do not change this.
USS Stewardship Report 2021 3 Contents Introduction 4 2020: Activities and highlights 6 USS Stewardship Code Report 2021: A principle-by-principle account 9 Section 1: Purpose and Governance 10 Principle 1: Purpose, strategy and culture 10 Principle 2: Governance, resources and incentives 12 Principle 3: Managing conflicts of interest 15 Principle 4: Promoting well-functioning markets 16 Principle 5: Review and assurance 18 Section 2: Investment Approach 19 Principle 6: Client and beneficiary needs 19 Principle 7: Stewardship, investment and ESG integration 20 Principle 8: Stewardship, investment and ESG integration 26 Principle 9: Engagement 30 Principle 10: Collaboration 33 Principle 11: Escalation 36 Principle 12: Exercising rights and responsibilities 38 USS Responsible Investment Team biographies 44
4 USS Stewardship Report 2021
Introduction
Welcome to the first Stewardship Code report from the Universities Where we invest
Superannuation Scheme. The focus of this report is the scheme’s
response to the 12 Stewardship Principles developed by the Financial
-13.3%*
Reporting Council (FRC). Principle-by-Principle, we describe how 26.9%
we implement our commitments to the UK Stewardship Code and
summarise our responsible investment activities and outcomes 6.5% 38.4%
across all of our asset classes, with a particular focus on the financial By Asset
year 2020-2021. 11.0%
We are proud of the progress we have About Us 1.9%
made, both in terms of our broader USS, the Universities Superannuation
1.1%
responsible investment thought Scheme, is the principal pension scheme 21.9%
5.5%
processes, and also in our engagements for universities and higher education
with public and direct investments institutions in the UK. We are the largest Cash & Overlays Absolute Return
and how they are responding to private pension scheme in the UK,
Listed Equities Other Fixed Income
Property Nominal Government
Environmental, Social and Governance with some £68 billion in assets under Other Private Markets Bonds
(ESG) challenges. In our inaugural report, management. USS’s in-house manager, USS Commodities Index-linked
we are particularly pleased to highlight Investment Management (USSIM), acts
Government Bonds
some of the significant steps we have as principal manager and advisor to the
taken to integrate ESG factors into our scheme, including the appointment and 2.4%
investment philosophy, as part of our monitoring of a number of other external
longstanding commitment to responsible 37.3% -13.3%*
investment managers. We manage almost
investment, as well as offering reflections 70% of our assets in-house.
on the outcomes we have achieved and
how we might strengthen our approach in
the coming years. By Geography
44.6%
2.4%
11%
1.3%
14.3%
Global Australia & New Zealand
Africa South America
Asia North America
Europe UK
*Denotes leverage
USS Stewardship Report 2021 5
Our commitment to
stewardship Our approach
As a pension fund with liabilities Our activities as a responsible investor fall into three core areas:
extending decades into the future,
1. Integration: We seek to include financially material ESG considerations
it is in USS’s interests to encourage
within investment decision-making processes. By integrating material ESG
the companies, assets and markets in
considerations with a financial bearing into our investment methodology,
which we invest to focus on delivering
USS seeks to identify mispriced assets and enable our portfolio managers
sustainable investor value.
to make better investment decisions to enhance long-term performance.
We believe that investing responsibly, by We do this as we believe additional returns are available to investors
integrating material environmental, social, who take a long-term view and are able to identify where the market is
ethical and corporate governance (ESG) overlooking the role played by material ESG considerations in corporate
issues into investment decision making, and asset performance. Systematic mishandling of ESG issues can also be
and engaging as long-term owners, both an early indicator of wider mismanagement or financial problems. There
reduces risk and positively impacts fund is good evidence that poor corporate governance decisions affect the
returns. We also believe that the way a interests of long-term investors.
company is run and overseen, and how
it manages its environmental and social 2. Engagement, voting and stewardship: As a long-term investor we believe
risks, such as its approach to climate we have an obligation to act as stewards of the assets in which we invest
change or health and safety, will impact and to behave as active owners, using our influence to promote good
the long-term financial returns that it will ESG practices. We believe that such stewardship can both help prevent or
make for its investors. avoid value destruction and reduce the negative impacts companies can
have on the environment and society.
The Trustee Board has both led and
supported the Scheme’s Responsible 3. Market transformation activities: Universal investors are those who, like
Investment (RI)-related activities for many USS, have holdings that are so diversified that their investment returns are
years: our first policy on RI was launched impacted by the returns from the economy as a whole, as much as any
in 1999, the first team members were specific industries or companies. USS believes that we have a role to play
appointed in 2000, and our first work on in promoting the proper functioning of markets, from which we benefit
climate change risk and opportunities as a universal investor. This includes engagement with policymakers and
was undertaken in 2001, when USS first regulators in markets in which we invest, to articulate the concerns of
assessed the implications of climate asset owners and long-term investors. We seek to ensure that externalities
change for institutional investors. and systemic market failures, such as pollution, climate change or
systemically weak corporate governance standards, do not affect market-
Furthermore, USS considers that these
wide, long-term economic performance.
policies should be applied across the
asset classes in which we invest as
consistently as possible – both public
and private – and whether internally or
externally managed. USS’s approach to
responsible investment revolves around
the effective stewardship of all our assets,
focusing in particular on sustainability and
good corporate governance.
6 USS Stewardship Report 2021
2020: Activities and highlights
Despite the COVID-19 pandemic, we sustained and strengthened our stewardship activities in 2020.
Boxes 1 to 4 below present some specific highlights.
Taking action on Our changing
1 the sustainability
of investments
2 investment
portfolio
In early 2020, USSIM began a detailed review of a In early 2020, USSIM moved a significant proportion
selection of sectors in which the scheme invests. of the scheme’s equities from a concentrated
It looked for differences between what industry portfolio to an interim external manager. This formed
financial models predicted on returns and what the first step in a long-term strategy to change the
we could reasonably expect to happen over the developed market equity investing – away from our
long term. We concluded that, in several cases, traditional concentrated stock-picking and towards a
the outcomes predicted by the market did not longer‑term thematic approach – integrating ESG and
appropriately consider the potential financial impact other long-term factors into portfolios. We believe
of certain specific risks, including ESG. that the impact of ESG issues and other long-term
factors will be critical drivers of investment returns as
As a result, we excluded certain sectors from our
well as risks, and they should shape the portfolio in
investment universe as they were deemed to be
the years to come.
financially unsuitable over the long-term. These
included: tobacco manufacturing; thermal coal As a consequence of this move from a relatively
mining (to be burned for electricity generation) concentrated portfolio to a much broader and
specifically where it comprises more than 25% of more diverse spread of investments, we have
revenues, and certain controversial weapons. We also increased our participation in collaborative
are already well on our way to fully pulling out of engagements, working more widely with other
investments under our direct control in these sectors investors to promote good practice. We were
and will have ceased to invest in them by the end of an early leader in collaborative engagement and
May 2022 at the latest. involved in the establishment of several collaborative
initiatives which support stewardship activities and
collective engagement in the UK and other markets.
We are proud that the scheme recognised the gravity
of climate change and founded the IIGCC in 2001;
that we were involved in the development of the
United Nations-backed Principles for Responsible
Investment (UNPRI) and were a founder signatory;
and that we were founder members of the Transition
Pathway Initiative in 2017. The climate change case-
study in box 3 illustrates our approach.
USS Stewardship Report 2021 7
Taking action External
3 on climate
change
4 manager
monitoring
We were one of the first pension funds in the USSIM has a detailed RI due diligence and monitoring
world to recognise climate change as a risk to our process for external fund managers (for both public
investments and we believe collaboration is key and private markets). These questionnaires are
to positive action. For example, we founded the similar in content, with the due diligence version
Institutional Investors Group on Climate Change establishing a baseline set of data which then form
(IIGCC) and continue to participate in its policy and the basis for the proposed biennial monitoring
other working group. We also actively worked with programme. We have also introduced a scoring
our investor partners for over a decade to address system to be better able to benchmark and rank
the issue in different markets around the world. the ESG performance of the external managers, an
example of which is available online. More details
We are proactive in our support for a number of
of our approach to external managers is provided in
global engagements designed to improve corporate
Principle 8.
behaviour. This is shown by our work as part of
the Climate Action 100+ initiative with Royal Dutch As a result of this work, we were delighted to
Shell – led by the Church of England Pension Fund be identified by the UN-backed Principles for
and Dutch asset manager, Robeco – the outcomes Responsible Investment (UNPRI), as one of the
of which have been ground-breaking. In 2018, Shell signatories in its 2019 inaugural Leaders’ Group for
committed to reducing its carbon emissions by 50% our activities associated with
by 2050, to help align the company with the Paris the selection, appointment
Agreement. Subsequently, in both 2020 and 2021, it and monitoring of external
committed to taking significant additional action on managers in listed and private
climate change, including a target of achieving net- markets. This put the scheme
zero emissions by 2050 or sooner. This encouraged in the top 10% of asset owners.
others in the sector to make similar statements.
We are proud to be
recognised by the UNPRI
in its 2020 Leaders’ Group
for our work on climate
change related activities.
8 USS Stewardship Report 2021
Looking ahead Second, we have recently made a Net Zero
We believe that the scheme can by 2050 announcement. Implementing
always improve its approach to RI, and this ambition, which applies to all of
continually look for ways to improve its our assets, will require us to carefully
practices and policies. In 2021/2022 we consider where we invest, and how we
will focus on strengthening our approach use our influence with the companies and
to stewardship in three areas. other assets in which we invest and with
policymakers. We have played an active
First, we will strengthen our approach to role in the development of the IIGCC
stewardship in corporate bonds. To date, Net Zero Investment Framework, and are
we have generally dealt with corporate currently exploring how we might use
bonds as part of our stewardship efforts the framework to measure our current
on listed equity. While this has delivered performance and to develop a strategy to
many improvements, we are aware that get to net zero.
this approach is imperfect: issuers that are
not publicly listed tend to get ignored, and Finally, the process of preparing this
the governance issues around bonds (e.g. report has reinforced the importance
investor rights, investor disclosures) tend of ensuring that we have a systematic
to get less attention than needed. approach to ESG data collection and
analysis across portfolios, including public
markets, private markets and our direct
investments. This will help us understand
ESG risks in a portfolio-wide context, so
that we can ensure that we effectively
manage those risks and opportunities.
USS Stewardship Report 2021 9 USS Stewardship Code Report 2021: A principle-by-principle account
10 USS Stewardship Report 2021
Section 1: Purpose and Governance
Principle 1: Purpose, strategy and culture
Principle 1
Signatories’ purpose, investment beliefs, strategy, and culture enable stewardship that
creates long-term value for clients and beneficiaries leading to sustainable benefits for the
economy, the environment and society.
Our purpose
As the principal pension scheme for Our culture and values
universities and other higher education Our organisational values underpin our approach to investing
institutions in the UK, our purpose is responsibly. They are clearly defined and built on three pillars of
predicated on our unique position within integrity, collaboration and excellence. These values guide what
the investment industry: working with we do, including how we invest, and how we act as stewards of the
employers to build a secure financial assets in our portfolio.
future for our members and their families.
In pursuit of our purpose, it is our duty to
Integrity
invest in the financial interests of all our • We always do the right thing
members and beneficiaries. • We put our members’ interests first
• We take decisions for the long term
Our beliefs
At the heart of our organisation is a long- Collaboration
held belief that promoting high standards • We work towards a common goal
of ESG, and allocating responsibly to • We take responsibility for our own actions
companies and other assets, will protect
• W
e are straight-talking and respectful in our dealings with
and enhance the value of our investments
each other
by reducing the risks associated with
investing. We also believe it enhances Excellence
our ability to meet the pension promises
• W
e set high standards for ourselves and our colleagues for
made to members by our sponsors. That
the benefit of our members
is why active ownership and stewardship,
as well as assessing investment risk • We adapt and innovate to achieve the best outcome
in all its forms, are fundamental to • We bring our best selves to work, every day
our approach to managing the assets
entrusted to us.USS Stewardship Report 2021 11
Stewardship: Putting our
purpose, beliefs, culture and At USS, we put responsible investment into practice by:
values into practice Integrating environmental, social and corporate governance factors into our
We express our purpose and values investment decisions across every asset classes.
through how we invest, how we manage Engaging, voting and applying stewardship. We use our influence as a major
our members’ assets and how we meet institutional investor to promote good ESG practices.
our members’ needs (we discuss how
our approach meets our members’ Working with policy makers and regulators to ensure the concerns of long-
needs under Principle 6). As active term asset owners and investors are clearly understood.
owners, we focus on sustainability and
good corporate governance. We also
ensure the investment managers who
are selected and appointed by our
Trustees consider all financially material
considerations including ESG factors
related to the selection, retention and
realisation of investments.
In practice, our responsible investment
approach means we consider the
potential impact of ESG factors on our
investment decisions. We analyse and
assess the impact of these factors in our
investments, across all asset classes,
regardless of market or structure and
both before we invest, and during the life
of our investment.
Case-study: Climate stewardship
Long-term stewardship is central to Supported by the Board, Moto, one This has included the installation of a
our fiduciary duty to our members. In of USS’s direct transportation-related biomass boiler, which provides heating
line with our sponsors’ covenant and assets has been focussing on energy and hot water through the combustion
liability profiles, we invest for the long- efficiency and reducing emissions. At of fuels from a sustainable source, and
term and expect to own companies one of its sites it has been taking a LED lighting for outside parking areas
and investments for many years. This is three-stage approach: with energy efficient controls and ‘dark
particularly true of the direct investments sky’ fittings to reduce the risk of light
the scheme makes. • R
educing energy demand through
pollution.
passive design measures
We believe the way a company is run, The site is also providing 12 EV charger
and manages environmental and social • R
educing energy consumption via
spaces, with an additional 12 to come.
issues (such as its approach to climate efficient plant/equipment systems/
change or diversity and inclusion) will central controls The learnings from this project will be
impact the long-term financial returns it shared with other sites in the asset’s
• U
sing renewable energy to further
will generate for its investors. We conduct portfolio.
reduce demand, pollution and CO2
enhanced due diligence before making emissions
direct investments and also monitor post-
acquisition stewardship activities of the
assets held in our portfolio.12 USS Stewardship Report 2021
Principle 2: Governance, resources and incentives
Principle 2
Signatories’ governance, resources and incentives support stewardship.
Our governance structure
We believe a strong organisational Limited (USSL) is the Corporate Trustee This board comprises:
governance structure, paired with a that runs and manages the scheme, with
• F our directors appointed by
commitment to investing responsibly for a Group Executive Committee that looks
Universities UK
the long-term, provides the necessary after day-to-day operations.
pathway to deliver effective stewardship • T hree directors (one of whom is the
The Trustee board is responsible for the
today and develop and build on our pensioner member) appointed by the
overall leadership, strategy and oversight
approach for the future. University and College Union
of USSL and the wholly-owned subsidiary,
As an organisation, we are structured USSIM, that invest the Scheme’s • B
etween three and five (or between 1
and governed in a way that supports our assets, including the appointment and September 2019 and 1 February 2021,
commitment to responsible investment monitoring of a number of other external six) independent directors
and stewardship of our members’ assets. investment managers.
Universities Superannuation Scheme
USS Group Corporate Governance Structure
Joint Negotiating
Advisory Committee
USSL Board Committee
(Advisory)
(JNC)
Governance and Remuneration Group Audit Investment
Pensions Committee
Nominations Committee Committee Committee
(PC)
Committee (GNC) (RemCom) (Audit) (IC)
Group Chief Executive USSIM Board
Officer
We believe a strong organisational (GCEO)
governance structure, paired with a USSIM Audit and Risk
Group Executive Compliance Committee
commitment to investing responsibly for Committee (USSIM ARC)
the long-term, provides the necessary (GExCo)
pathway to deliver effective stewardship USSIM Chief
Executive Officer
today and develop and build on our Pensions Executive (USSIM CEO)
approach for the future. Committee
(Pensions ExCo)
USSIM Executive
Committee
Pensions
Operating Group
(POG)USS Stewardship Report 2021 13
The board agrees the responsible Our stewardship resourcing Clear responsibilities
investment (RI) strategy and formally We have built a dedicated in-house RI Our RI team is organised into two
reviews the responsible investment team (see “Specialist Expertise”, below) groups. One focuses on public market
team’s activities annually, signing off key that works with internal managers integration and stewardship, including
focus areas and policies. This includes and monitors external managers and voting and engagement, while the other
reviewing the effectiveness of our assets, ensuring material ESG factors are is responsible for external managers – in
stewardship processes and includes integrated into investment decisions. both public and private markets – and
discussion of whether our resourcing, The team also ensures managers act as direct asset due diligence and monitoring.
expertise and approach are appropriate stewards of those assets. This activity
to managing our members’ assets and The whole team works with the internal
is overseen by the USSL Investment
meeting our members’ needs. asset managers to ensure the integration
Committee, which provides assurance
of ESG risks into investment decision
Our RI strategy is implemented and to the board that its policies are
making across asset classes where they
monitored by USSIM. Our Statement being implemented.
are considered material. It also works with
on Responsible Investment sets out other USSIM teams, delivering oversight
detailed information on how we consider Specialist expertise
and monitoring of external managers.
ESG factors when we invest, and how We established specialist in-house RI
this is communicated and demanded resource two decades ago. Today, we The team leads much of the stewardship
of our internal and external managers. have one of the largest responsible activity that encourages both listed
Organising ourselves in this way enables investment teams of any UK pension companies and other portfolio assets to
the investment function to take the scheme, comprising seven experienced manage better climate change-related
initiative in implementing the scheme’s ESG professionals. This team represents and other ESG risks. In addition, USS’s
ESG polices. The in-house nature of USS the scheme’s interests in the ownership internal fund managers frequently
means the board is closer to the assets and stewardship of its assets and helps engage directly with companies and
than is the case for the majority of UK the scheme take a leadership position other portfolio assets on ESG issues both
pension funds. on a spectrum of ESG issues. These individually and in conjunction with the
range from climate change (USS set up specialist team. Pre-Covid 19, daily formal
the IIGCC in 2001), ensuring UK listed and informal interactions promoted the
The board has supported the companies comply with the Modern collaboration and sharing of insights
scheme’s climate change activities Slavery Act (USS participates in an between our investment specialists and
since 2001, when the scheme ongoing Rathbones-led collaboration responsible investment team. During
completed its first assessment on this issue), and seeking assurances the pandemic, well-established practice
of the implications of the issue from large mining companies on their meant that whilst more challenging,
for institutional investors. In approaches to indigenous community these interactions have been able to
addition to an annual responsible rights (following the destruction by Rio continue remotely.
investment reporting and review Tinto of the 46,000 year old Aboriginal
cycle, the board receives other heritage site in Juukan Gorge, Australia).
inputs on ESG management as
Our RI team biographies can be found on
and when deemed necessary.
page 44 of this report.
It also receives regular updates
on the climate change-related
activities in which the scheme’s
executive are involved. Having an in-house RI team drives better coordination of
activities across the scheme and means both directors of
the trustee board and the executive have direct access to
expertise on the investment implications of ESG issues.14 USS Stewardship Report 2021
Engagement meeting notes and voting • G
overnance for Owners Japan For the USSIM investment team, the score
letters for publicly-listed companies Engagement Coalition (JEC) who may also reflect a qualitative assessment
are shared systematically with portfolio engage on our behalf with Japanese of investment activity. For non-investment
managers via an Internal Research companies where disclosure and employees, the score will reflect the
Home (IRH) function on Bloomberg. language can be a barrier. achievement of objectives related to an
This provides USS’s equities, credit and individual’s role and function. In addition
• W
e also utilise the services of Asia
RI teams with a record of how we voted to specific ESG key performance indicators
Research and Engagement (ARE) as
and our view of the specific company’s (KPIs) for relevant investment staff, the
with their specialist Asia focus they
ESG practices. RI notes, voting records incorporation of ESG in investment-related
add additional resources in what is an
and engagement notes are also included activities could impact the remuneration
increasingly important market.
alongside investment cases and decision of all members of staff, whether they are
notes. Various ESG data are also recorded Both of these organisations provide front-line investors or not.
in the investment case on equity ‘tear- collaborative engagement services. In
Individual personnel have ESG-related KPIs
sheets’, which are reviewed in preparation selecting the organisation that undertake
that are relevant to their roles. These may
for company meetings. this for us we have looked at both ESG
relate to topics such as:
and local knowledge, and importantly
A member of the RI team also attends
engagement experience in delivering • T heir work with the RI team to
Global Emerging Markets (GEMs - our
stewardship and other RI related services integrate RI/ESG metrics and
active portfolio) meetings to discuss
(including proxy voting support). stewardship into their investment
ESG issues resulting from research
practices and processes (e.g. in 2019
and engagements. All votes against While we find these third-party providers
and 2020, we had a particular focus on
management in our active portfolio are extremely valuable, we are clear that
strengthening our approach in global
reviewed with the relevant manager prior the final responsibility for investment,
emerging markets and in public credit)
to the vote being cast, along with other stewardship and voting decisions remains
points of contention. with us. • T heir work on integrating specific ESG
issues into investment models and tools
Additional resources Performance management: (e.g. in 2020, we had a particular focus
In addition to our RI team, we also use Motivating our teams to achieve on incorporating climate change into
external service provides to support our RI our responsible investment goals long-term projected return analysis and
activities. For example, Minerva provides Delivering RI outcomes, fulfilling our scenario analysis, and on evaluating the
our proxy voting platform. purpose and operating in line with our impact of ESG tilts on returns)
We do not usually engage via service values is the responsibility of everyone • S upporting the scheme in achieving
providers because we have an in-house in our organisation. We empower our its ESG goals (e.g. our new net-zero
team that engages with companies teams to do their part, and consider ambition)
in our portfolio as we consider this how they are incentivised to meet RI-
related goals as part of our performance • U
pholding USS’s commitment to being
approach to be advantageous because
management process. an active and responsible owner of
the engagement remains aligned with
assets through adhering to voting and
the investment analysis conducted by the As part of this, we ensure individual engagement policies
internal portfolio manager. behaviours that incorporate ESG
Notwithstanding this point, we have considerations are rewarded. This involves
chosen two external providers where assigning a qualitative score that reflects
language and cultural nuances in individual performance and contribution
engagement would point to more local to the achievement of objectives set.
service providers engaging on our behalf. Colleague assessment reflects both what
was achieved and the manner in which it
was done, ensuring behaviours are fully
reflected in how we reward.USS Stewardship Report 2021 15
Principle 3: Managing conflicts of interest
Principle 3
Signatories manage conflicts of interest to put the best interests of clients and beneficiaries first.
Our commitment
USS has a Conflicts of Interest Policy and USS Group reviews its policies and
In line with our stated value of integrity,
processes on this aspect of our operations at least annually. This review
our members’ interests come first. This
involves an assessment of actual and potential conflicts, including in relation
includes a pledge to meet the highest
to responsible investment and stewardship activities.
possible standards of openness and
accountability, and ensure that we
conduct our business with honesty USS Group also maintains a Register of The USS Compliance Team maintains a
and transparency. We ensure legal Conflicts of Interest. This includes an list of securities and other assets in which
and regulatory requirements are assessment of the inherent and residual USS group staff members have holdings,
fully complied with and we expect all risk of each actual or potential conflict we and there are processes in place to ensure
employees to continually meet the highest identify, along with the controls in place any dealing in stocks held by the fund
standards expected of them in their to manage or mitigate them. Our Code of avoid conflicts of interest. Our compliance
client and business activities. Any action Conduct also provides a clear statement of team also maintains a restricted list and
in contradiction of this position is taken ethical standards, including a duty to act personal account dealing policies to
extremely seriously and we are committed with reasonable care, skill and diligence in mitigate trading related conflicts. This
to applying the full extent of internal and the best interests of scheme beneficiaries, includes restricting stocks held by the
external sanctions as appropriate. and to avoid or manage conflicts of interest. scheme if a potential conflict arises.
Our position
Being prepared for when a conflict may arise
As a beneficial owner with in-house
As we have noted, as a beneficial owner with in-house investment management and
investment management and responsible
responsible investment capabilities, and serving only one client, USSL does not face
investment capabilities, and serving only
many of the potential conflicts of interest that commercial fund managers may need
one client, USSL does not face many of
to address. However, one instance where a conflict may arise is outlined below:
the potential conflicts of interest that
commercial fund managers may need to Scenario
address. Nevertheless, we monitor for
A staff member could potentially hold an external role with a firm that USS Group has
potential conflicts of interest on an on-
business dealings with, or which requires excess time or resource which may detract
going basis.
from the time and attention they should be paying to their role as an employee and
Ensuring robust practice the duty to act in the best interests of USSL. To mitigate this type of conflict:
We ensure we comply with legal and • USS Group maintains an External Appointments policy
regulatory requirements and expect all • New joiners are required to complete an external positions declaration
employees to meet the highest standards • Staff are required to declare any new external positions for approval
in their client and business activities. We
• A
ny external positions that may result in a potential or actual conflict will be
take any contradiction of this position
recorded into the conflicts of interest register along with how such conflicts
extremely seriously, and are committed
have been mitigated. A Register of Actual and Potential Conflicts is maintained
to applying the full extent of internal and
on an ongoing basis
external sanctions as appropriate.
• T here is an annual Compliance declaration requiring staff to confirm that they
have no external positions that have not previously been declared16 USS Stewardship Report 2021
Principle 4: Promoting well-functioning markets
Principle 4
Signatories identify and respond to market-wide and systemic risks to promote a well-functioning
financial system.
Fostering sustainable markets
To strengthen our voice, we also engage on these matters alongside other investors
for a sustainable future through collaborations such as the Asian Corporate Governance Association,
As a pension fund with in-house Institutional Investors Group on Climate Change, International Corporate Governance
investment expertise and liabilities Network and the Australian Council of Superannuation Investors (see Principle 10 for
extending decades into the future, we are further detail). We have met with government representatives, regulators and SOE’s in
unequivocal that an active approach to markets as diverse as South Korea, Australia, Hong Kong, India, Canada, the US, South
responsible investment and stewardship Africa, the Netherlands, Japan, Brazil and the European Commission over the years.
is critical to cultivating well-functioning For example, in 2019 (the last year such a trip was possible) a member of our RI team
markets over the long term. engaged with various Japanese regulators as part of an ACGA study tour. This included
We are a long-term advocate of the meetings with the METI (Ministry of Economy, Trade and Industry), the Financial
need for an investor voice in policy Services Agency (FSA), and the Japan Stock Exchange. Issues discussed included
development because we believe corporate governance, the Japanese stewardship code and its implementation,
engagement with policy makers on corporate reporting, climate change, and board diversity: all systemic issues.
ESG and related factors improves how We have also made submissions to policy consultations and discussions,
markets operate. We also recognise examples of which are highlighted in boxes 1 and 2, below. Under Principle 7, we
that stronger markets lead to stronger discuss how our approaches to stewardship – company engagement and policy
economies, which strengthen the fiscal engagement – and investment decision-making are integrated.
position of governments. Therefore, our
engagements with policymakers also aim
to protect or enhance our investments
across asset classes, from public equities
1. In January 2020, we wrote to the US Securities and Exchange Commission about
its proposed rule amendments to address proxy advisors’ reliance on the proxy
to sovereign debt.
solicitation exemptions in Rule 14a-2(b). We expressed concern about the proposal
For 20 years, we have highlighted market- that proxy advisors share advance copies of their recommendations with issuers.
level engagement as a specific objective We argued that proxy advisors are agents of institutional investors, not of issuers,
of USS’s RI strategy. Our engagement and stated that such a process would not be helpful to the proxy voting process as
with policymakers and governments it had the potential to compromise the independence of the research, to introduce
internationally covers issues such as additional costs and complications to an already compressed process, to create
stewardship and accounting regulation. additional barriers to entry and to negatively impact competition in the proxy advisory
It also includes listing rules, shareholder market. We also expressed concern that the SEC’s proposals to change voting
protections, corporate governance, thresholds would significantly raise the percentage vote a proposal must receive to
transparency and disclosure, and be resubmitted, making it more difficult to submit and sustain proposals.
climate change.
2. Also in January 2020, we wrote to the Japanese Financial Services Agency about its proposed revisions to the Japan
Stewardship Code. In our letter, we welcomed the proposed extension of the Stewardship Code beyond Japanese public
equities to other asset classes. We also welcomed the extension of the Code to encourage stewardship beyond a traditional
focus on corporate governance. We suggested that the Code should be clear about the importance of asset owners, in
particular those with fewer stewardship resources, engaging with their external managers and other service providers on
stewardship, thereby promoting stewardship through the entire investment chain.USS Stewardship Report 2021 17
In Focus: our action on climate change
Climate change – as a key systemic risk Examples of our policy engagement work Climate change is not
– has been an enduring area of focus for on climate change in 2020 included:
only a policy issue,
USS. It is also an issue that exemplifies our
• R
esponding to the UK government’s but also a stewardship
approach to stewardship.
consultation: Taking action on climate
one and has been a
As a long-term investor, we recognise risk: improving governance & reporting
that climate change presents critical by occupational pension schemes central theme in many
issues for us now, and will do in the of our engagements, as
• P
articipating in consultations and
future. For instance: rising sea levels will
engagements with DWP / BEIS on TCFD
evidenced throughout
impact property and infrastructure asset this report.
reporting. We supported the proposals as
valuations, weather events will disrupt
we believe that such reporting will lead
supply chains and corporate activity and
to more pension fund engagement on
public policy changes and regulation to
climate change, and therefore hopefully
support the transition to a low carbon
better attention to climate-related
future will create winners and losers. We
issues. We highlighted the importance
were one of the first pension funds in the
of taking a system-wide approach
world to recognise climate change as a
and of sequencing the introduction of
risk to our investments and we believe
reporting requirements, noting that Asset
collaboration is key to positive action. For
Owners would only be able to report in
example, in 2001 we founded the IIGCC
a meaningful way if other actors – e.g.
and continue to participate in its policy
asset managers (across asset classes) and,
and other working group. We have actively
indeed, underlying assets – also reported
worked with our investor partners for over
this information
a decade to address the issue in different
markets around the world.
1
ompanies greenhouse gas emissions can be classified in three scopes: Scopes 1, 2 and 3
C
Scope 1 emissions are direct emissions from company-owned and controlled resources (e.g on-site fuel combustion,
emissions from vehicles owned or controlled by a firm, releases from industrial processes.
Scope 2 emissions are emissions from the consumption of purchased electricity, steam, heat and cooling.
Scope 3 emissions are all indirect emissions – not included in scope 2 – that occur in the value chain of the reporting
company, including both upstream and downstream emissions.18 USS Stewardship Report 2021
Principle 5: Review and assurance
Principle 5
Signatories review their policies, assure their processes and assess the effectiveness of their activities.
We have a proactive and transparent We recognise the importance of external • A
ssess whether the controls relating
approach to internal and external review assurance processes and respond annually to USSIM’s ESG policies and principles
and assurance, and take appropriate to the UNPRI’s signatory survey. Based are operating effectively, including
action where and when necessary. on our responses to this survey, in 2019, how they are governed (e.g., reviewed
the UNPRI named us as leaders for our and updated)
Our RI policies and statements are
approach to selecting, appointing and
available on our public website (uss.co.uk) • A
ssess whether the controls in place
monitoring external managers (see also
and we submit regular reporting and for monitoring and adhering to
Principle 8 below), and in 2020 we were
monitoring of the scheme’s activities to USSIM’s ESG policies and principles
recognised us as leaders for our approach
the board and its investment committee. are designed and operating effectively.
to climate change.
Data elements that appear in our annual This included the impact on controls
report and accounts, for example on ESG Internal Audit 2020/21 over ESG related activities of any
voting data, are also formally audited by changes in working practices as a
The scheme’s RI activities are part of
the scheme’s external auditors. result of COVID-19, and any new or
the USS internal audit programme. This
interim key controls introduced into
The RI team reports to the board annually, is an independent appraisal function
ESG related activities in response to
where the board agrees the scheme’s established by the board, which carried
COVID-19 (insofar as these controls
RI and formally reviews the RI team’s out an ESG-specific audit during the
remain within the scope of our review)
activities, signing off key focus areas and financial year 2020/21. We will report
policies. It receives additional input on on the results of the audit and of the • R
eview the controls relating to the
ESG management, where necessary, and improvement measures adopted as a validation of ESG information (such as
undertakes training on RI-related issues. result in our 2021 Stewardship Report. external manager due diligence) and
The team also reports formally to the the internal and external reporting of
The objective of this audit was to assess
investment committee twice a year. ESG information to assess whether
the design and operating effectiveness of
they are operating effectively.
For additional monitoring and assurance, the controls and governance of USSIM’s
This included the controls the ESG
our Audit, Risk and Compliance and adherence to its ESG policy, along with
team has in place to ensure the
Managers and Mandates Committees the internal and external reporting of
data provided to them is complete,
also receive regular reporting on ESG ESG information.
accurate and valid
due diligence and monitoring (volumes
In scope of the audit was:
and ratings), and track voting process
implementation and performance. • R
eview of USSIM’s ESG policies,
principles and controls to understand
The scheme has also established
the process for developing them
detailed external manager monitoring
and how they account for ESG issues
programmes to assess and ensure its
within investment decision making
responsible investment policies are being
implemented (see Principle 8).USS Stewardship Report 2021 19
Section 2: Investment Approach
Principle 6: Client and beneficiary needs
Principle 6
Signatories take account of client and beneficiary needs and communicate the activities and
outcomes of their stewardship and investment to them.
We have proudly served as a not-for- • O
ur policy to address voting in our We are also developing more regular
profit Corporate Trustee since 1974, and securities lending programme content such as Q&A’s for the website
employ more 500 people in London and and member newsletter articles as well
• H
igh level case-studies across asset
Liverpool. During the period to 31 March as video content for Facebook as a more
classes in our responsible investment
2020, USS paid out nearly £2bn in benefits visually compelling way of engaging with
reporting and through video explainers
to 74,608 pensioner members. We also our members. This will more specifically
such as USS & Thames Water: Working
have 204,753 active and 180,353 deferred cover USSIM, its investments and ESG. We
together to make a better future
members who are accruing benefits with are also planning a number of member
us and whose interests we seek to serve. • A
socio-economic, community and webinars during the rest of the year with
biodiversity report for our real estate a focus on USSIM and specifically our
Helping our members stay portfolio developments in ESG.
engaged and informed We recognise that effective Additionally, in 2020 USS, including board
With such a large and unique communication is not a one-way process. members and senior management, held
membership, effective and efficient Our members’ views are critical as we several discussions with member groups
communication is key. invest for their long-term futures. such as Ethics for USS/Divest USS and the
Our members are increasingly aware of In October 2020, we invited members Universities and Colleges Union (UCU).
and engaged with the interconnected ESG to share their views on sustainable USS is responsive to media engagement
factors that may impact their investments. investment, including beliefs on their and also writes occasional thought
Our communications professionals general importance and on particular leadership content and blogs covering
respond to this by regularly reviewing sectors and activities, through a survey in ESG and responsible investment. For
our written, digital, regular and ad hoc collaboration with Maastricht University. example, Balancing ESG reporting and
communications to ensure they continue stewardship, an article for Funds Europe,
to meet member needs and expectations. Among other things, members indicated
that ESG issues were important to them, and It’s Not Just About The Money – The
Our principal communications outlet for as well as providing direct feedback on Role Of Investors In Society for the 2020
our members is our website, individual areas which will help us review ICGN yearbook.
www.uss.co.uk, which features a the guidelines that govern our ethical
dedicated section on responsible investment options later on this year.
investment, and our RI reports. Here
we publish reports and information on, Keeping our members informed of
amongst other things, the following: material developments that may impact
their investments is critical. Notably, in
• Our
Responsible Investment June 2020, we announced our actions that
Statement resulted from an internal strategic review,
• Our approach to exclusions including our decision to make our first
set of divestments in certain sectors (see
• Our voting policy Principle 7 for further detail).20 USS Stewardship Report 2021
Principle 7: Stewardship, investment and ESG integration
Principle 7
Signatories systematically integrate stewardship and investment, including material
environmental, social and governance issues, and climate change, to fulfil their responsibilities.
Our Investments
Potential ESG issues
Our asset class and geographic mix –
and the specific companies, entities The USS Statement on Responsible Investment provides the following list of ESG
and sectors we invest in within these issues which can be used when assessing investments and deciding on priorities
asset classes and geographies – means for voting and engagement:
that we do not have a one size fits all • bribery & corruption risk management
approach to prioritising ESG issues for • climate change
assessing investments. Instead our • consumer and public health
approach to prioritisation for our voting • corporate governance
and engagement activities is based on the • customer satisfaction
following criteria: • cyber security
• T he size of our holdings in the entity • environmental performance management
or the size of the asset, portfolio • executive remuneration
company and/or property • health and safety
• capital practices
• T he home market of the asset or • human rights
portfolio company • innovation; research and development (R&D)
• T he materiality of ESG factors and • intellectual capital management reputational risk
their effect on financial and/or • succession planning
operational performance • the social impacts of corporate activity
• stakeholder relations
• T heir ESG scores, and their rankings in • supply chain management
specific benchmarks, in particular the • transparency and disclosure
Transition Pathway Initiative and the
Workforce Disclosure Initiative Once we have prioritised assets, portfolio companies or other entities for voting
and engagement, we define our objectives for engagement and determine
• S pecific ESG factors with systemic whether we will conduct individual engagements, engage in collaboration with
influence (e.g. climate or other investors or whether others will engage on our behalf (see Principle 2).
human rights)
• T he adequacy of public disclosure on
ESG factors/performance
• Bribery and corruption-related issuesUSS Stewardship Report 2021 21
Our approach • T hird party scores, ratings and Sovereign debt
Having an in-house Responsible assessments of ESG risks are made USS utilises a proprietary tool, first
Investment function allows us to integrate available through the IRH page. We developed in 2008, which ranks countries
our stewardship and our investment have access to MSCI ESG ratings and based on ESG factors. For the Emerging
decisions across the scheme. reports in Bloomberg which we take Market Debt (local currencies) portfolio,
into account when assessing individual the composite index ranking is one of the
Listed equity and credit investment opportunities. When core tools used in portfolio construction.
As expressed in our core beliefs (Principle reviewing new credit investment The results of the composite country score
1), we feel strongly that promoting high opportunities or existing investments is combined with a fundamental credit
standards of ESG practice and allocating within the portfolio, the team reviews assessment and integrated with two other
responsibly to companies and other rating agencies reports, many of which factors to formulate the investment strategy.
assets, will protect and enhance the now explicitly incorporate a review of
ESG factors Positive ESG country scores are viewed as
value of our investments by reducing
an indicator of lower future default risk
the risks associated with investing. It • A
member of the RI team attends and negative ESG scores are viewed as
follows, therefore, that active ownership Global Emerging Markets (GEMs - our being an indicator of higher future default
and stewardship, as well as assessing active portfolio) meetings to discuss risk. Our investment approach attempts to
investment risk in all its forms, are ESG related issues resulting from avoid countries where the risk of default
fundamental to our approach to managing research and engagements is increasing, to improve the quality of the
the assets entrusted to us.
• A
ll votes against management for our portfolio and better match the risk appetite
Our philosophy of integrating engagement active portfolio are discussed with the (in sovereign debt) to the scheme. ESG
and investment decision-making is relevant portfolio manager prior to country rankings contribute to this analysis
central to the way in which we manage the vote being cast and other points of but are not the only input. This ESG country
our listed equity and credit investments. contention are also discussed analysis is also built into our emerging
In doing so, we ensure our views on a markets decision making processes.
company’s approach to managing ESG • A
research note outlining the
issues, together with its responsiveness investment case is completed by a
to investor engagement is explicitly portfolio manager for every active Taking a view on Turkey
discussed and taken into account by our position in the USS Equity Portfolio.
USSIM exited the scheme’s active
investment teams. We do this in a variety Corporate governance scores and
listed equity investments in Turkey
of ways, including: the environmental and social scores
in 2020 on broad governance
are automatically embedded in
• E ngagement meeting notes and voting and social concerns. USSIM had
the template of this document. In
letters are shared systematically with previously been underweight
addition, the responsible investment
portfolio managers via an IRH page on Turkey relative to our index due
team may complete a report (“RI
Bloomberg. This provides the Equities, to concerns arising from both
Perspective”) outlining the material
Credit and Responsible Investment our ESG scoring at a country
ESG risks and opportunities that are
teams with a record of how we voted level (incorporated in our asset
relevant to the company
and views of the firm’s ESG practices allocation and screening process)
• T he RI team also contributes to and fundamental research. With
• F or public equities, voting records, the investment process through ESG factor risks rising in Turkey,
engagement notes and reviews of a specific research and analysis on key USSIM believed deteriorating
company’s approach to various ESG company specific issues. Company governance and social stability
issues are included alongside the engagements will frequently involve posed a threat to equity returns
investment cases and decision notes. both the internal portfolio manager and USSIM reduced our country
In addition, various ESG data are also and a member of the RI team. Such equity weighting to 0%.
recorded in the investment case on engagements also normally involve an
the tear-sheets which are reviewed in internal pre-meeting and depending
preparation for company meetings on the outcome, a post-meeting
discussion between RI and the
Portfolio Manager will also take place22 USS Stewardship Report 2021
Private Markets/Direct Assets ESG due diligence is undertaken for all For environmental and social issues,
For direct assets, the relationship direct deals and presented within the we typically use the Global Real Estate
between stewardship and investment slide deck prepared for the internal USSIM Sustainability Benchmark (GRESB -
decision-making is broadly similar. oversight committees. This due diligence which USS helped to establish in 2009)
ESG engagement by the responsible process seeks to identify any material Infrastructure framework. This is an
investment team is shared directly with legal, ethical, governance, reputational, internationally accepted environmental
the Private Markets Group (PMG) team environmental and social risks that and social performance assessment
in writing and in regular presentations could potentially affect the value of the process for property and infrastructure
and updates to the Portfolio investment and explores whether there assets and funds. We also conduct
Review Committee. are appropriate processes in place to face-to-face ESG review meetings with
mitigate these factors. It is underpinned representatives of the company to discuss
Examples of our direct investments by site visits by the deal team, extensive how the asset’s managers are addressing
include stakes in renewable energy assets commercial, legal and operational due ESG risks and opportunities. The purpose
including onshore and offshore wind, diligence for the assets. If appropriate, of these assessments is to compare
G. Network (a fibre network company) the scheme will also appoint specialist the current ESG management at our
Thames Water, Moto (motorway service external advisors and consultants to assets with best practice and to identify
stations), holdings in infrastructure assess ESG risks and performance if these recommendations for improvement.
assets like Heathrow, and a significant are deemed material for the asset under Past recommendations have covered
property portfolio. investigation. contractor oversight, human capital
management, air pollution, health &
For direct private markets assets, USS
safety and community relations.
Responsible investment is an will typically have board representation
integral part of the selection and material influence at the company Recommendations are made to the
and retention of directly held to affect and oversee ESG performance. PMG’s Portfolio Review Committee
private assets. This is particularly Additionally, the responsible investment whose members have the ability to
important in our direct team, working alongside the USS directors influence investee companies. Our
investments as we expect to own on the board, will undertake ESG reviews. Board membership of direct assets gives
them for many years and we have us greater access to information on
Once we are invested, we follow an
the ability to directly influence management issues including ESG risks
ESG review process that was formalised
board composition, strategy, and more direct influence on a company’s
in 2017/18 using market leading
corporate social responsibility strategy and priorities. We expect each
frameworks. We assess the level of
activities, and remuneration. Board to monitor progress over time,
commitment shown to high quality
including reducing its environmental
corporate governance including the
impact, lowering its operational costs
structure and functioning of the board
and improving its financial performance.
of directors, the control environment
For larger companies, it is already
and processes and transparency and
normal business practice to report such
disclosures. Each of these factors are
metrics both internally and externally.
scored against best practice to identify
For example, Heathrow’s Sustainability
how the governance at the business could
strategy is available online here.
be improved.You can also read
