FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | LONG-TERM FINANCE Sustainable Investment: Best Practice Disclosure Checklist for Pension Funds © 2020 The World Bank Group 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved. This volume is a product of the staff and external authors of the World Bank Group. The World Bank Group refers to the member institutions of the World Bank Group: The World Bank (International Bank for Reconstruction and Development); International Finance Corporation (IFC); and Multilateral Investment Guarantee Agency (MIGA), which are separate and distinct legal entities each organized under its respective Articles of Agreement. We encourage use for educational and non-commercial purposes. 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Photo Credits: iStock.com/BrianAJackson, Shutterstock.com FINANCE, COMPETITIVENESS FINANCE, COMPETITIVENESS & INNOVATION & INNOVATION INSIGHT | FINANCIAL INSIGHT INCLUSION, INFRASTRUCTURE | LONG-TERM FINANCE & ACCESS TABLE OF CONTENTS EXECUTIVE SUMMARY VII REPORT BACKGROUND AND OBJECTIVES 1 The World Bank/GPIF Partnership 1 Why Focus on Asset Owners? 1 The Best Practice Checklist 2 THE BEST PRACTICE DISCLOSURE CHECKLIST: AN OVERVIEW 3 TESTING THE CHECKLIST: APPROACH 7 THE CHECKLIST: KEY FINDINGS AND INSIGHTS 11 Overall Findings 11 About the Organization 12 Sustainable Investment: Strategy and Governance 17 Sustainable Investment: Listed Equity 23 Sustainable Investment: Delegated (outsourced) Investment Management 25 Sustainable Investment: Climate Change 27 CONCLUDING COMMENTS 31 APPENDIX 1: THE CHECKLIST IN DETAIL 33 ENDNOTES 39 SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST I FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | LONG-TERM FINANCE ABBREVIATIONS AND ACRONYMS AUM assets under management CalPERS California Public Employees’ Retirement System (USA) CDP formerly the Carbon Disclosure Project CPF Central Provident Fund (Singapore) CPP Investments Canada Pension Plan Investment Board ESG environmental, social and governance (issues) GPIF Government Pension Investment Fund (Japan) IFC International Finance Corporation MIGA Multilateral Investment Guarantee Agency NBIM Norges Bank Investment Management (Norway) NPS National Pension Service (South Korea) NSSF National Social Security Fund (China) PFZW Stichting Pensioenfonds Zorg en Welzijn (The Netherlands) PRI Principles for Responsible Investment SSGS Special Singapore Government Securities TCFD Task Force on Climate-related Financial Disclosures UNCTAD United Nations Conference on Trade and Development UNEP–FI United Nations Environment Programme – Finance Initiative SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST III FINANCE, COMPETITIVENESS FINANCE, COMPETITIVENESS & INNOVATION & INNOVATION INSIGHT | FINANCIAL INSIGHT INCLUSION, INFRASTRUCTURE | LONG-TERM FINANCE & ACCESS ACKNOWLEDGMENTS This report has been prepared by Dr. Rory Sullivan (Chronos Sustainability) and Fiona Stewart (Lead Financial Sector Specialist, World Bank). Research assistance was provided by Jake Reznick (independent consultant) and Shinjin Ayuha (World Bank). We would like to thank all of those individuals and organisations who provided information for and commented on earlier drafts of this report. Thanks to Amanda Williams (Chronos Sustainability) for help in editing and Aichin Jones (World Bank) and Amy Quach for support in the design and production of the report. SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST V FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | LONG-TERM FINANCE EXECUTIVE SUMMARY T here are compelling reasons for asset owners – in particular large pension funds and sovereign wealth funds – to adopt sustainable investment, and for governments to support them in these endeavours. First, asset owners have a key role to play in providing the capital that supports national economic and development goals. Second, sustainability issues – for example, climate change, labour rights, public health – are important drivers of investment value. Third, asset owners play a key role in building the conditions for the widespread adoption of sustainable investment. Better disclosure (or transparency) by asset owners world’s largest pension funds. This analysis has is an important mechanism for driving sustainability provided some interesting insights into how these in investment markets and in the wider economy1 . funds – many of whom are regarded as leaders on Yet, while the general case for asset owner sustainable investment – are currently reporting disclosure is clear, it is not clear what disclosures on their approach to sustainable investment. It has asset owners should provide or what information also helped us to identify a series of best practice would be most useful to their stakeholders (which examples that might be of interest to other pension include governments, asset managers, companies funds as they proceed on their reporting journey. and civil society). This checklist has been developed These insights and examples, which are relevant to provide a comprehensive list of the disclosures to both developed and emerging market pension that asset owners’ stakeholders are likely to be funds, are presented in this report. interested in. It has been tested on some of the 100 90 80 70 60 Percentage 50 40 30 20 10 0 About the Governance Sustainable Delegated Climate Organisation and Strategy Investment: Investment Change Listed Equity Average Min Max SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST VII FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | LONG-TERM FINANCE REPORT BACKGROUND AND OBJECTIVES The World Bank/GPIF Partnership I n 2017, the World Bank Group and the Japanese Government Pension Investment Fund (GPIF) established a partnership to direct more capital towards sustainable investments2. The partnership, which was expanded in 20193, includes collaborating on initiatives that promote the inclusion of environmental, social and governance (ESG) criteria in investment decisions across different asset classes and convening regular conversations with investors to explore opportunities and challenges of integrating ESG into investment strategies. As part of this programme, the World Bank Group often hold assets over the medium and long term, and GPIF have published two reports: Incorporating corresponding to the timeframes over which many Environmental, Social and Governance Factors sustainability issues are expected to play out. There into Fixed Income Investment4 in 2018 and Public is evidence that companies with better performance Pension Fund Governance and Investment: Lessons on these issues tend to have better operational from Asia5 in 2019. performance with lower risk, and that investment strategies that incorporate sustainability-related Why Focus on Asset Owners? issues tend to outperform comparable investment strategies that do not account for these issues6. There are compelling reasons for asset owners There are also significant investment opportunities. – in particular large pension funds and sovereign For example, between now and 2030, between wealth funds – to adopt sustainable investment, US$5-US$7 trillion a year is needed to realise the and for governments to support them in these Sustainable Development Goals worldwide7. endeavours. First, asset owners have a key role to play in providing the capital that supports Third, asset owners play a key role in building national economic and development goals. Asset the conditions for the widespread adoption owners can encourage capital flows into more of sustainable investment. This is particularly sustainable activities and companies, and away important in emerging markets where government- from activities and companies that are considered backed asset owners are frequently the dominant less sustainable. Asset owners can also help actors in the domestic market. When these asset ensure that the companies and other entities they owners strengthen their commitments to sustainable invest in have robust governance and management investment, they create a series of positive and systems and processes, and respond effectively to reinforcing changes through the investment the opportunities and the risks presented by trends system as a whole. These can include encouraging such as the transition to the low carbon economy, investment managers and investment advisers the desire for safe and high quality food, and rising to develop and offer products that enable asset standards of living. owners to deliver on their sustainable investment commitments, and encouraging investment in Second, sustainability issues – for example, more sustainable activities and companies8. There climate change, labour rights, public health – is also an element of peer pressure, where other are important drivers of investment value. This asset owners feel pressure to mirror or match the is particularly relevant to asset owners as they commitments being made by their industry peers9. SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 1 The Best Practice Checklist governments, asset managers, companies and civil society). A variety of reporting frameworks and Better disclosure (or transparency) by asset assessment frameworks have been developed for owners is an important mechanism for driving asset owners. There are many commonalities across sustainability in investment markets and in the these but also some important points of difference. wider economy10. Such disclosures allow asset We have therefore developed a best practice managers and companies to see the importance checklist that provides a comprehensive list of being assigned to sustainability issues by the disclosures that asset owners’ stakeholders asset owners in their investment practices and are likely to be interested in. We describe this processes. They help explain how sustainability checklist in more detail in Appendix 1. issues are taken into account by asset owners in their investment decision-making, in asset We have tested the checklist by applying it to some manager selection and in active ownership of the world’s largest pension funds. This process (company engagement). They allow stakeholders has presented some interesting insights into how – beneficiaries, government, wider society – to these funds – many of whom are regarded as leaders hold asset owners to account for their approach on sustainable investment – are currently reporting to sustainability. They facilitate shared learning on their approach to sustainable investment. It has and provide examples for other asset owners, for also helped us to identify a series of best practice companies and for asset managers to follow. examples that might be of interest to other pension funds as they proceed on their reporting journey. While the general case for asset owner disclosure These insights and examples, which are relevant is clear, it is not clear what disclosures asset to both developed and emerging market pension owners should provide or what information would funds, are presented this report. be most useful to their stakeholders (which include REPORT BACKGROUND AND OBJECTIVES 2 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | LONG-TERM FINANCE THE BEST PRACTICE DISCLOSURE CHECKLIST: AN OVERVIEW F igure 1 presents the key elements of the checklist. The main subject areas covered by the checklist set out in Table 1 below and the specific questions are presented in Appendix 1. Figure 1: Key Elements of the Best Practice Checklist About the Governance Sustainable Delegated Climate Change Organisation and Strategy Investment by Investment • Information • Core information • Information about Asset Class • Information about the about the the organisation’s • Information about about how the organisation’s organisation, investment beliefs, the organisation’s organisation approach to including its size, strategy, policies, approach to outsources climate change its investments, objectives and investment investment in its investment its objectives and targets, and decision-making management. process. its mandate. governance. and active ownership in its major asset classes. The checklist structure aligns with the general The checklist is a comprehensive list of the process organisations generally follow when disclosures that should be provided by asset owners developing and implementing sustainable when reporting on their sustainable investment investment. That is, they start by clarifying their activities. This iinformation should enable own organisational purpose and mission, and their stakeholders to understand: organisational objectives. They then define their • What the organisation is and what its core purpose aims and objectives for responsible investment, the and objectives are. main responsible investment strategies that they use and the main targets that they set for themselves. • What the organisation’s beliefs and commitments They will then move to implementation in the on sustainable investment are. various asset classes that they manage. In the • How these beliefs and commitments are translated checklist, we analyse this implementation in three into action. ways. First, we analyse how sustainable investment is implemented in the major asset classes held by the • The organisation’s performance against its asset owner. Second, we analyse how sustainable beliefs, its commitments and its objectives and investment is implemented in outsourced (or targets. delegated) investment management. Third, we look at the specific case of climate change (as a specific ESG issue). SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 3 The checklist builds on and aligns with the most • CDP disclosure requirements15 commonly used disclosure frameworks in the sustainable/responsible investment area. These • The Asset Owners Disclosure Project rankings include: of asset owners, asset managers and insurance companies16 • The Principles for Responsible Investment (PRI)11 Reporting and Assessment Framework • The VBDO ranking of Dutch pension funds17 • The Investment Leaders Group Long-Term • The Responsible Investor reporting awards18 Disclosure Framework12 The checklist does not offer a view on the ‘right’ • The Sovereign Wealth Fund Institute Linaburg- approach to sustainable investment but on the Maduell Transparency Index13 disclosures that should be provided about the asset owner’s approach to sustainable investment. • The recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)14 Table 1: An Overview of the Best Practice Checklist About the Organisation History and context Does the organisation provide an overview of its history including the reasons for its creation? Mission and mandate Does the organisation describe its overarching mission and objectives? Finance and governance Does the organisation publish information on its investment performance and strategy? Does the organisation publish details of its overall governance structure? Assets under management Does the organisation publish details of its total assets under management, and their allocation by asset class, geography and investment strategy? Reporting Does the organisation have its sustainable investment-related reporting assured or otherwise reviewed by an external party? Sustainable Investment Strategy and Governance Investment beliefs Does the organisation publish its investment beliefs, including its views on the relevance of sustainability to its investment practices, processes and performance? Investment strategy Does the organisation describe its investment strategy, and explain how sustainability is integrated into its risk management processes? Investment objectives Does the organisation specify its investment objectives and the timeframes over which it assesses performance? Policy Does the organisation publish an overarching sustainable investment policy or similar document? Stakeholder Engagement Does the organisation identify its key stakeholders and the issues that are of concern to these stakeholders? Objectives and Targets Does the organisation publish objectives and targets for its sustainable investment activities, and does it report on progress against these? Responsibilities and Accountabilities Does the organisation specify who is responsible for oversight and for implementation of the sustainable investment policy? THE BEST PRACTICE DISCLOSURE CHECKLIST: AN OVERVIEW 4 Promoting Sustainable Investment Does the organisation list the sustainable investment initiatives and codes it is a member of or a signatory to? Public Policy Engagement Does the organisation report on its dialogue with public policy makers or regulators in support of sustainable investment? Asset Allocation Does the organisation describe how it considers sustainability issues in asset allocation decisions? Sustainable Investment by Asset Class Investment Does the organisation describe its approach to assessing and managing sustainability- related issues in the asset class? Does the organisation describe how its approach affects the composition of its portfolio? Does the organisation explain how its approach has affected the sustainability performance of its portfolio? Active Ownership Does the organisation describe how it engages with (and, for listed equity, voted on) the companies/entities/assets in which it is invested? Does the organisation describe how this engagement has influenced the sustainability- related performance of these companies/entities/assets? Delegated Investment General Does the organisation describe how sustainability-related issues are managed by its external investment managers? Manager Selection Does the organisation explain how sustainability-related information is incorporated into manager selection processes? Manager Appointment Does the organisation describe how sustainability-related issues are incorporated into manager requirements (e.g. mandates, reporting requirements)? Manager monitoring Does the organisation describe how it monitors and reviews the sustainability-related performance of its external investment managers? Climate Change Governance Does the organisation describe how it oversees and manages climate-related risks and opportunities? Strategy Does the organisation describe the impact of climate-related risks and opportunities on its investments and on its businesses, strategy and financial planning? Risk Management Does the organisation describe its processes for identifying, assessing and managing climate-related risks? Metrics and Targets Does the organisation describe the metrics and targets it uses to manage climate- related risks and opportunities, and does it report its performance against these targets? SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 5 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | LONG-TERM FINANCE TESTING THE CHECKLIST: APPROACH T he world’s largest asset owners (see Table 2) are, as a group, widely recognised as leaders on sustainable investment. They have been to the forefront of efforts to drive sustainability through investment markets and into the wider economy. They have also provided extensive disclosures on their approach to responsible investment, the actions they have taken and the outcomes they have achieved. We have applied the best practice checklist to We would like to thank the teams from all funds eight of the ten asset owners listed in Table 2. We which provided detailed comments and extremely excluded the Central Provident Fund (CPF) of useful insights and feedback on the process. Singapore because its approach is very different to the others on the list. The CPF Board invests Each of the eight asset owners was initially assessed CPF members’ monies in Special Singapore in Q3 2019. The focus was on the organisation’s Government Securities (SSGS) issued specially most recent sustainable investment (or equivalent) by the Singapore Government to the CPF Board. report and, if relevant, the sustainable investment This arrangement insulates CPF members from section of their websites. In addition, where the investment risk, as SSGS are guaranteed by the asset owner pointed to other sources of information Singapore Government, and allows the CPF Board (e.g. their response to the PRI signatory survey, to pay what it promises to CPF members. We also information published on their behalf by their excluded the Chinese National Social Security investment managers), this information was also Fund (NSSF) because it is currently in the process taken into account. The assessment was based on of researching sustainable investment and ESG information/reports in the public domain on the and deciding how these might be relevant to China date that the assessment was conducted. and to Chinese asset owners and asset managers. Table 2: The World’s Largest Asset Owners (at September 2019) Fund Name Country Government Pension Investment Fund (GPIF) Japan Norges Bank Investment Management (NBIM) Norway Federal Retirement Thrift USA National Pension Service (NPS) South Korea ABP The Netherlands National Social Security Fund (NSSF) China California Public Employees’ Retirement System (CalPERS) USA Canada Pension Plan Investment Board (CPP Investments) Canada Central Provident Fund (CPF) Singapore Pensioenfonds Zorg en Welzijn (PFZW) The Netherlands SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 7 Following this initial assessment, asset owners ten asset owners responded with detailed comments. received a short summary of their results and a A final review of the assessments was conducted detailed question-by question assessment. They in late December to ensure the completeness and were requested to check the assessments for factual accuracy of the assessments and to incorporate any accuracy and completeness, and to identify areas additional information that had been provided by where they considered they achieve best practice in the participating asset owners. terms of practice, performance or reporting. Four of Asset owners were provided with a summary of their results and a detailed question by question assessment. ASSET OWNER ABC ASSET OWNER ABC QUESTION BY QUESTION ASSESSMENT (extract) 100 SUSTAINABLE INVESTMENT AND STRATEGY 90 2.1 Investment Beliefs 80 No Question Yes/No Comments/Notes/Sources 70 2.1.1 Has the organisation Yes See Sustainability and published its investment Responsibility section of 60 beliefs? Asset Owner ABC’s website (www.assetownerABC. 50 sustainabilitywebsite). 40 2.1.2 Do the investment beliefs Yes See Sustainability and set out the organisation’s Responsibility section of 30 views on the relevance Asset Owner ABC’s website of sustainability to its (www.assetownerABC. 20 investment practices, sustainabilitywebsite). processes and performance? 10 2.1.3 Does the organisation Yes See Sustainability and explain how sustainability- Responsibility section of 0 About the Strategy Listed Govt Infrastructure Other Asset Climate related issues create long- Asset Owner ABC’s website Organisation and Equity bonds Classes Change term investment value? (www.assetownerABC. Governance sustainabilitywebsite). Summary 2.1.4 Does the organisation define No We were unable to find a formal what it means by ‘long term’? definition or specification of Asset Owner ABC provides a comprehensive description of the organisation and of long-term. its overall sustainable investment-related strategy and governance. It provides a clear account of its organisational mission, its investment beliefs, its investment objectives 2.2 Investment strategy and strategy and its sustainable investment policy. It explains who is responsible 2.2.1 Has the organisation Yes See Sustainability and for oversight and implementation of the policy and of how sustainable investment described its investment Responsibility section of is incorporated into its reward processes. The scores for these sections could be strategy, explaining how it Asset Owner ABC’s website further improved if additional information was provided on Asset Owner ABC’s will deliver on its investment (www.assetownerABC. financial performance and the overall sustainability-related characteristics of its beliefs? sustainabilitywebsite), in investment portfolios. particular the discussion of leveraging thematic drivers Asset owner ABC’s reporting on the specific asset classes within its portfolio is more 2.2.2 Has the organisation No While Asset Owner ABC’s limited. While it a high-level description of its approach to sustainable investment, explained how sustainability states ‘We integrate ESG and it provides limited information on the sustainability-related characteristics of these is integrated into its risk sustainability issues in our portfolios or of how its activities have influenced these characteristics. Its slightly management processes? risk management process’, it higher score for infrastructure reflects the fact that it lists all of the holdings in this does not explain provide any asset class, and provides some data on the greenhouse gas emissions from its additional information on the process. energy sector investors in this asset class. 2.2.3 Has the organisation No Asset owner ABC states ‘The The score on climate change reflects the fact that Asset Owner ABC provides a clear identified its material issues we focus on include account of its climate change governance and of its risk management processes sustainability-related climate change and corporate but limited information on the greenhouse gas-related characteristics of its issues? governance’ but it does not investment portfolio. describe the process it has worked through to identify material issues nor does it provide a comprehensive list of the issues considered in its materiality assessment. TESTING THE CHECKLIST: APPROACH 8 Some Notes on the Assessment Process 1. Information that was not clearly sign-posted from the asset owner’s website and/or website was not included in the assessment. The reason is that asset owners cannot assume that stakeholders have the time or technical knowledge to effectively search other sources of information. 2. The assessments were based on information/reports in the public domain on the date that the assessment was conducted. 3. For the purposes of trialling the checklist, the focus was on the three largest asset classes (by AUM) managed by each asset owner. 4. Asset owners that did not delegate investment management to investment managers or other providers were not assessed on that element of the framework. 5. Questions were assessed on a Yes/No basis with 2 points awarded for Yes, and 0 points for No. If there was ambiguity or incomplete information questions were assessed as partial (i.e. the criterion was partially met), 1 point was awarded. 6. Questions that were considered to be not applicable (e.g. the questions on voting are not relevant to asset classes other than listed equities), were excluded from the assessment. SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 9 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | LONG-TERM FINANCE THE CHECKLIST: KEY FINDINGS AND INSIGHTS Overall Findings The overall findings are presented in Figure 2. A s can be seen, all of the funds provide quite extensive disclosures about their organization, their mandates and their governance. Those organizations that have made commitments to sustainable investment provide similarly good disclosures. The lower average score can be explained by the fact that some funds have only recently started to develop their sustainable investment objectives and strategies, and their disclosures are correspondingly lagging. The results also tell us is that the disclosures being Figure 2 includes the results for listed equity as this provided about their organizational approach is the most common asset class across the funds to sustainable investment is not matched by the surveyed. For other asset classes, the average disclosures they provide about their implementation and maximum scores are significantly lower. The of their sustainable investment commitments, e.g. one exception is real estate where a number of the how these commitments are implemented in listed pension funds use building ratings standards such equities, in delegated (outsourced) investment as GRESB to structure their reporting. management or in the specific case of climate change. Figure 2: Summary Results 100 90 80 70 60 Percentage 50 40 30 20 10 0 About the Governance Sustainable Delegated Climate Organisation and Strategy Investment: Investment Change Listed Equity Average Min Max SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 11 In the following sections we discuss the results information is often not available through the in more detail but we offer two wider reflections asset owner’s website, meaning that it is difficult here. The first is that many of the asset owners for stakeholders to gain a full picture of the asset have additional information about their approach owner’s approach to responsible investment or the to sustainable investment that they do not currently outcomes and impacts that result from these efforts. disclose. For example, some noted that they do engage with stakeholders but choose not to publish About the Organization this information. The second is that many are not making use of their asset managers to support their The aim of these questions is to assess whether the reporting. The asset managers used by these asset pension fund provides core information about itself owners can often provide a significant amount of (for example its size (or assets under management), information on how they integrate ESG issues into its main investments by asset class, its investment their investment processes and on the engagement and organizational objectives, its governance). they conduct on behalf of their clients. Yet, this Organizational Overview Has the organisation provided an overview of its history Yes Yes Yes Yes Partial Yes No No including the reasons for its creation? Has the organisation explained the origins of its wealth (i.e. Yes Yes Yes Yes No Yes Partial Yes how it is funded)? Has the organisation described its ownership structure? Yes Yes Yes Yes Yes Yes No Yes Has the organisation described its overarching mission and Yes Yes Yes Yes Yes Yes Yes Yes objectives? Has the organisation described the legal and other obligations Yes Yes Yes Yes Yes Yes Yes Yes that apply to it? Note: These include sustainability-related obligations, and other obligations that affect its approach to sustainability. Has the organisation published an annual report describing its Yes Yes Yes Yes Yes Yes Yes Yes overall performance and strategy? Has the organisation reported on its investment performance Yes Yes Yes Yes Yes Yes Yes Yes over at least three years? Has the organisation published details of its overall governance Yes Yes Yes Yes No Yes Yes Yes structure? Has the organisation published the names of its board of Yes Yes Yes Yes Yes No Yes Yes directors? Has the organisation published the names of its senior Partial Yes Yes Yes No Partial Yes No management team? THE CHECKLIST: KEY FINDINGS AND INSIGHTS 12 All eight of the funds provide comprehensive disclosures about their organisation, their history, Best Practice Case-study20 their sources of funding, and their ownership. All Norges Bank Investment Management (NBIM) has also describe their governance processes, including prepared a short video describing the fund. details of their boards of directors and their senior management teams. In addition, they all provide a detailed description of their mission and objectives, and of the legal and other obligations that apply to them. These are important as they define the approach that the organisation can take to implementing its sustainable investment strategy, as illustrated by the example of GPIF in Box 1. Best Practice Case-study19 Best Practice Case-study21 The South Korean National Pension Service lists The South Korean National Pension Service the key the laws and regulations that apply to it. describes how its key stakeholders and committees relate to each other. Report Cabinet Council & President National Assembly Review & approve fund management plan Report for the President’s approval Report fund management activities Give guideline on fund management planning Ministry of Strategy Ministry of Health and Welfare (MoHW) and Finance Submit fund management plan Fund Management Committee (chair: Minister of MoHW) Fund Evaluation Committee (chair: Vice Minister of MoHW) CoE on Performance CoE on Investment CoE on Voting Evaluation Policy & Compensation NPS CoE: Council of Expertise National Pension Audit Division Research Institute (polky advice & fund evaluation) NPSIM Policies and fund evaluation Compliance Officer SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 13 Best Practice Case-study22 Best Practice Case-study23 NBIM provides a clear description of its The Federal Retirement Thrift publishes details of the key regulations governance structures. that apply to it. Best Practice Case-study24 GPIF provides an overview of the Japanese retirement and pension system. Box 1: Extracts from the GPIF Annual Report Fiscal Year 201725 • “The third Medium–term Objectives call for thorough compliance with the duty of care and fiduciary duty of prudent experts.” • “When managing the pension reserve, GPIF is required to consider the market size, not to be exposed to unfavourable market impact, and to avoid concentration of timing of investment and/or collection.” • “GPIF is required not to unduly exert influence on corporate management but to take appropriate measures such as exercise of shareholders’ voting rights for maximizing long–term returns to shareholders.” • “We fulfil Stewardship Responsibilities based on Japan’s Stewardship Code. However, we do not select individual stocks by ourselves, in consideration of the impact on corporate management.” THE CHECKLIST: KEY FINDINGS AND INSIGHTS 14 Assets Under Management Has the organisation stated its total assets under management? Yes Yes Yes Yes Yes Yes Yes Yes • By asset class? Yes Yes Yes Yes Yes Yes Yes Yes • By geography (domestic versus international)? No Yes No Yes Yes Yes Yes Yes • By whether the assets are internally or externally managed? Yes Partial No Partial Yes Yes Yes Yes • By whether the assets are actively or passively managed? No Partial No No No No Yes No • In terms of the proportion that are covered by ethical screens? Yes Partial No Yes No No Yes Yes • In terms of the proportion that are covered by active ownership Yes No No No No No Yes Partial strategies? • In terms of the proportion where sustainability-related issues are Yes No No No No No No Yes explicitly integrated into the investment research and decision- making process? • In terms of the proportion that are invested in sustainability- Yes No No Yes No No No Yes related areas? While all of the funds state their total assets under is provided on the coverage of their sustainable management, the level of information provided investment strategies, e.g. on the proportion of on how these assets are allocated by asset class assets where screens are applied, where active or by geography is variable. Most provide limited ownership is practiced or where sustainability information on whether their assets are internally or issues are explicitly integrated into the investment externally managed, or whether they are actively or research and decision-making process. passively managed. In addition, limited information Best Practice Case-study26 Best Practice Case-study27 GPIF provides a breakdown of its investments by Canada Pension Plan (CPP) Investments reports asset class. on the geographic distribution of its investments. SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 15 Best Practice Case-study28 PFZW describes its investments in different sustainability-related areas. THE CHECKLIST: KEY FINDINGS AND INSIGHTS 16 Sustainable Investment: Strategy to their investment practices, processes and and Governance performance. Many supplement this information with descriptions of how their investment The aim of these questions is to determine whether strategy aligns with their investment beliefs and the pension fund provides information about its of how sustainability is integrated into their risk investment beliefs, strategy, policies, objectives management processes. Most also identify their and targets, and sustainability governance. material or most significant sustainability-related issues, and define the timeframes over which they Most of the funds publish their investment beliefs assess their investment performance. and/or their views on the relevance of sustainability Investment Beliefs Has the organisation published its investment beliefs? Partial Yes Yes Yes Yes No Yes Yes Do the investment beliefs set out the organisation’s views Partial Yes Yes Yes Partial No Yes Yes on the relevance of sustainability to its investment practices, processes and performance? Does the organisation explain how sustainability-related Yes Yes Yes Yes No No Yes Yes issues create long-term investment value? Does the organisation define what it means by ‘long term’? No Partial No Yes No Partial Partial No Has the organisation described its investment strategy, Yes Yes Yes Yes Yes Partial Yes Yes explaining how it will deliver on its investment beliefs? Has the organisation explained how sustainability is Yes Yes Yes Yes No No No No integrated into its risk management processes? Has the organisation identified its material sustainability- Yes Partial Partial Yes No No Yes Partial related issues? Does the organisation specify its investment objectives, e.g. Yes Yes Yes Yes Yes Yes Yes Yes by highlighting the benchmarks it uses to track and assess performance? Does the organisation specify the timeframes over which it No Yes No Yes No Yes Yes Yes assesses performance? SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 17 Best Practice Case-study29 CalPERS publishes its investment beliefs and a timeline describing the progress of its ESG strategic plan. Sustainable Investment Policy Has the organisation published an overarching sustainable Yes Yes Yes Yes No No Partial Yes investment policy or similar document? • Specify the coverage of the policy (in terms of the asset classes Yes Partial Yes Partial No No Partial Yes and AUM covered by the policy)? • Identify any exceptions to the policy? Yes Partial Yes No No No Partial Yes • Describe the integration of sustainability-related issues into its Yes Partial Yes Yes No No Partial Yes investment decision-making? • Describe the organisation’s approach to active ownership/ Yes Yes Yes Yes No No Partial Yes engagement? • Describe the organisation’s approach to voting its listed equities Yes Yes Yes Yes No No Yes Yes holdings (if relevant)? • Describe the organisation’s approach to climate change? Yes Yes Yes Yes No No Partial Yes Has the organisation published a policy on managing conflicts of No Yes Yes No No No No No interest in its investment process? THE CHECKLIST: KEY FINDINGS AND INSIGHTS 18 A majority of the asset owners surveyed have exceptions to the policy and the organisation’s published an overarching sustainable investment approach to investment decision-making, active policy or equivalent document that describes how ownership and voting. One notable omission is that they take account of sustainability-related issues few of the asset owners have published a policy in their investment practices and processes. These explaining how they manage conflicts of interest. policies generally specify the coverage of the policy, Best Practice Case-study30 NBIM has published a series of documents setting out its views on how companies in its portfolio should manage and respond to global challenges. Best Practice Case-study31 CPP Investments’ Policy on Responsible Investing explains how it approaches ESG factors within the context of its mandate to maximize long-term investment returns without undue risk of loss. CPP Investments’ Code of Conduct sets out its expectations on a range of ethical issues, including conflicts of interest and fraud, and also explains how the Code is implemented and enforced. SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 19 Stakeholders Has the organisation identified its key stakeholders? No No Yes No No No No Yes Has it indicated which of these it has engaged with? No No Yes No No No No Yes Has is identified the key issues raised by these stakeholders No No Yes No No No No Yes and the actions taken as a result? Asset owners have a range of stakeholders. These their active ownership strategies, and in terms of can include their beneficiaries, governments, the role they play in the public policy process. regulatory agencies, the companies and other It is, therefore, striking that just two of the eight entities in which they invest, investment managers asset owners identify their stakeholders, or discuss and other investment system actors, their employees the issues raised by these stakeholders. In their and the people and communities who are affected feedback on their draft assessments, two other asset by the social and environmental impacts of the owners did state that they engaged with a range of companies and other entities in which they invest. stakeholders but confirmed that they did not publish These stakeholders are also affected by the decisions information on this engagement. made by the asset owner, in terms of what they do and do not invest in, in terms of how they deliver Best Practice Case-study ABP has surveyed its stakeholders to identify the subjects that they are interested in hearing about in ABP’s responsible investment report. It discusses the priority of these issues for its board and for stakeholders. THE CHECKLIST: KEY FINDINGS AND INSIGHTS 20 Objectives, Targets, Responsibilities and Accountabilities Has the organisation published objectives and targets for its Yes No Yes No No No Yes Yes sustainable investment activities? Are the objectives and targets SMART (specific, measurable, Yes No Yes No No No Partial Yes achievable, realistic, time bound)? Has the organisation explained how the targets are to be Yes No No No No No Yes Yes achieved? Has the organisation set key performance indicators (KPIs) Yes No Yes No No No No Yes to assess progress towards the targets? Has the organisation reported on progress against the Yes No Yes No No No Yes Yes targets? Has the organisation described the factors that have affected Partial No Yes No No No Yes Partial its performance against these targets? Has the organisation specified who is responsible for No Yes Yes No No Partial Yes No oversight of the sustainable investment policy? Has the organisation specified who is responsible for No Yes Yes No No Partial Yes No implementation of the sustainable investment policy? Has the organisation stated who is responsible for the No No No No No Partial No No delivery of the targets? Has the organisation described how sustainable investment No No No No No No No No is incorporated in performance management and reward processes? Has the organisation described how sustainable investment No No No No No No No No is incorporated in personal development processes (e.g. training)? Disclosure on objectives and targets is much Less than half report on who is responsible for the more limited than on other aspects of strategy oversight and/or implementation of their sustainable and governance. Half of the eight asset owners do investment policy. Strikingly, none of the asset report on their objectives and targets, on the metrics owners report on how sustainable investment they use to assess their performance, and on their is incorporated into performance management, performance against these targets. professional development or reward processes. SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 21 Best Practice Case-study32 PFZW publishes information on its progress against the sustainable investment-related commitments it has made. Public Policy Engagement Has the organisation listed the sustainable investment No Yes Yes Yes No No Partial Yes initiatives it is a member of/signatory to? Has the organisation listed the sustainability-related codes No No No Yes No No Partial Partial and other commitments it has made? Has the organisation reported on its dialogue with public No No Yes Yes No No Yes No policy makers or regulators in support of sustainable investment? Has the organisation published copies of the sustainable No No Yes No No No No No investment-related submissions it has made to governments, regulators or public policy-makers? Approximately half of the funds list the sustainable report on their engagement with policymakers and investment initiatives and collaborative programmes just one reports on the submissions it has made to that they are involved with. A lower proportion policymakers, governments and regulators. THE CHECKLIST: KEY FINDINGS AND INSIGHTS 22 Sustainable Investment: Listed Equity Does the organisation describe its approach to assessing Partial Yes Yes Yes No No Yes Partial and managing sustainability-related issues in the asset class? Note: This may be screening, best in class, enhanced analysis. Does the organisation describe any variations in its Partial Yes Yes Yes No No Yes Partial approach across the asset class? Does the organisation describe how its approach affects Partial No No Yes No No No Partial its investment decisions (e.g. narrowed the investment universe, influenced buy-sell decisions)? Does the organisation describe how its approach affects No No No Yes No No No Partial the composition of its portfolio? Does the organisation describe how its approach No No No No No No No Partial has affected its financial performance or the financial characteristics (e.g. tracking error) of its portfolio? Does the organisation describe how its approach has Yes No No No No No No Partial affected the sustainability performance of its portfolio? • All of its holdings in the asset class? Yes Yes Yes Yes No Partial No Partial • The percentage of the asset class in sustainability-related No No No Partial No No No Partial investments? • The sustainability-related characteristics of the asset Yes No No Yes No No Yes Partial class? Does the organisation describe how it engages with the Partial Yes Yes Yes No No Yes Partial companies/entities/assets in which it is invested? Does the organisation describe how this engagement has Partial Partial Partial Yes No No Yes Partial influenced the sustainability-related performance of these companies/entities/assets? • The number of engagements carried out? No Yes Partial Yes No No Partial Partial • The engagement strategies/approaches used? Partial Partial No Yes No No No Partial • The proportion of the portfolio covered by engagement? No No No Yes No No Partial Partial • The subjects (topics) of engagement? Yes Yes No Yes No No Partial Partial • The objectives of its engagement? Partial Partial No Yes No No Yes Partial • The outcomes (i.e. changes in company practice) Partial No No Yes No No Yes Partial achieved from engagement? Does the organisation specify the shareholder meetings at No Yes Yes Yes No No No Partial which it voted its shares? Does the organisation report on the number of votes for No Yes Partial Yes No Yes Yes Partial and against management, and the number abstained? Does the organisation comment on the reasons for No No No Partial No Partial No Partial abstentions and votes against management? Does the organisation comment on the outcomes (i.e. Partial No No Partial No No No Partial changes in company practice) achieved through voting? SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 23 The aim of these questions is to determine whether the pension fund provides information about its Best Practice Case-study33 approach to investment decision-making and active ownership in its major asset classes. In presenting GPIF reports on trends in the governance characteristics of its listed equity portfolios. these results, we focus on public equity – which, depending on the asset owner, could be domestic or international public equity – as this is the asset class where sustainable investment reporting is best developed. The findings for other asset classes are similar. Our key finding is that most pension funds provide little or no information on how their sustainable investment policies are implemented in this asset class. There are pockets of best practice. For example, some funds do publish a full list of their holdings in the asset class, and describe the engagement and voting they have carried out. However, there is limited information on how sustainability-related, engagement or voting have affected the financial performance of the portfolio, or the sustainability performance of the portfolio. Best Practice Case-study34 In 2016, each CalPERs asset class developed a set of sustainable investment practice guidelines that reflects their needs and strategies. The guidelines integrate existing beliefs, principles, and policies related to ESG considerations, including CalPERs’ Investment Beliefs and Global Governance Principles, and the requirements of the Principles for Responsible Investment. CalPERS also established its Sustainable Investment Research Initiative (SIRI) Library to promote innovative thought leadership that would advance and inform its understanding of sustainability factors and the impact they may have on companies, markets, and investment intermediaries. SIRI is now a searchable database of over 1,900 papers on ESG topics, including issues such as income inequality and diversity. THE CHECKLIST: KEY FINDINGS AND INSIGHTS 24 Sustainable Investment: Delegated (outsourced) Investment Management The aim of these questions is to determine whether the pension fund provides information about how it outsources investment management. Does the organisation describe how sustainability-related issues Yes No Partial Yes No No Partial Partial are managed by its external investment managers? Does the organisation specify the sustainability-related Yes No Yes No No No Partial Yes strategies (e.g. screening, integration) that are to be applied by its external investment managers? Does it explain how these differ between investment managers n/a No Yes No No No No Yes or between asset classes? Does the organisation describe how its investment managers No No No No No No No No are rewarded for their sustainability-related performance? Does the organisation explain how rewards and incentives align No No No No No No No No with its investment beliefs, policies and objectives? Does the organisation describe the sustainability-relate n/a Yes Yes No No No Yes No information it typically reviews when selecting external investment managers? Does the organisation explain how sustainability-related n/a No Yes Partial No No Yes Partial information is incorporated into manager selection processes? Does the organisation specify what proportion of manager n/a No No No No No No No selection processes take account of sustainability-related information? Does the organisation explain how sustainability-related n/a No No No No No No No information has influenced decisions on manager selection Does the organisation explain how these decisions differ from n/a No No No No No No No those that would otherwise have been made? Does the organisation describe how sustainability-related issues No No Partial Partial No No No No are incorporated into manager requirements (e.g. mandates)? • The investment performance benchmarks (or other No No No No No No Yes No expectations) it sets for its external investment managers? • The sustainability-related performance objectives (or other No No No No No No No No expectations) it sets for its external investment managers? • The sustainability-related incentives it provides to its external No No No No No No No No investment managers? • The sustainability-related reporting it requires from its No No Partial No No No Partial No investment managers? • The actions it takes if investment managers do not meet No No No No No No No No their contractual obligations or do not perform in line with the organisation’s policies and other commitments? Does the organisation describe how it monitors and reviews No No Yes Partial No No Partial No the sustainability-related performance of its external investment managers? Does the organisation report on the sustainability-related Yes No No No No No No No performance of its external managers? SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 25 Our key finding is that the pension funds provide Limited information is provided on how investment limited information on how they delegate managers are rewarded for their sustainability- (outsource) investment management. Limited related performance, on what sustainability-relate information is provided on how investment information is reviewed when selecting external managers are rewarded for their sustainability- investment managers, or on how sustainability- related performance, on what sustainability-relate related information is incorporated into manager information is reviewed when selecting external selection, reporting and review processes. investment managers, or on how sustainability- Finally, it is striking that the asset owners surveyed related information is incorporated into manager tend not to report on the sustainability performance selection, reporting and review processes. In of their external managers, but capture this in the addition, the asset owners surveyed do not report overall sustainability and financial reporting they on how sustainability-related information has provide to their stakeholders. One consequence of influenced decisions on manager selection, or how this is that they may be missing an opportunity to the decisions they have made differ from those that showcase some of the work that their investment would otherwise have been made. managers have conducted on their behalf. Best Practice Case-study35 ABP publishes a list of its external investment managers. THE CHECKLIST: KEY FINDINGS AND INSIGHTS 26 Sustainable Investment: Climate Change The aim of these questions is to determine if the pension fund provides information about its approach to climate change, as a specific ESG issue, in its investment process. Has the organisation described its board oversight of climate- No Yes Yes Partial No No Yes Yes related risks and opportunities? Has the organisation described management’s role No Partial No Partial No No No Yes in assessing and managing climate-related risks and opportunities? Has the organisation described the climate-related risks and Partial No No Yes No No Partial Yes opportunities it has identified? Has the organisation described the impact of climate- No No No Yes No No No Partial related risks and opportunities on its investments and on its businesses, strategy and financial planning? Has the organisation described the resilience of the No No No No No No No No organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario? • Has the organisation described the scenarios it has used in No No No No No No Yes Yes its modelling? • Has it described the results of its modelling? No No No No No No Yes Partial • Has it explained how the results of the modelling have No No No No No No No No influenced its investment decisions? Has the organisation described its processes for identifying No Yes No Yes No No No Partial and assessing climate-related risks? Has the organisation described its processes for managing No No No Yes No No No Partial climate-related risks? Has the organisation described how processes for No No No Yes No No No Partial identifying, assessing and managing climate-related risks are integrated into its overall risk management processes? Has the organisation described the metrics it uses to assess Yes No No Yes No No Yes Partial climate-related risks and opportunities in line with its strategy and risk management process? Has the organisation disclosed its portfolio-related Scope 1, Partial Partial Partial Yes No No Partial Partial Scope 2 and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks? Has the organisation indicated the percentage of its total Yes No No Yes No No No No AUM in investments that support the low carbon transition? Has the organisation indicated the percentage of its total No No No No No No No No AUM in investments that support effective adaptation? Has the organisation described the targets it uses to manage Yes No No Partial No No No No climate-related risks and opportunities, and its performance against the targets? SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 27 Our key finding is that, at the time at which the Approximately half of the funds have identified assessments were conducted (August-September climate change as a strategic priority, and have 2019), the asset owners surveyed provided little or indicated that they intend to report more information no information on their approach to climate change. in 2020. Most have indicated that they intend to There were some climate change-related disclosures use the TCFD recommendations to structure this (e.g. on carbon footprints, on climate governance), reporting. although there were usually provided as part of a wider discussion on ESG or sustainability issues. Best Practice Case-study36 As part of its discussion of its approach to managing climate change, ABP presents a high-level assessment of how climate change will affect its investments and information on the distribution of its energy investments (by fuel type). THE CHECKLIST: KEY FINDINGS AND INSIGHTS 28 Best Practice Case-study37 Trucost analysed GPIF’s portfolios across a range of carbon and financial metrics. 2 Degree Alignment: Energy Transition Energy Generation Mix SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 29 FINANCE, COMPETITIVENESS & FINANCE, COMPETITIVENESS INNOVATION INSIGHT & INNOVATION LONG-TERM FINANCE INSIGHT || LONG-TERM FINANCE CONCLUDING COMMENTS T hrough their reporting on sustainable investment, the global asset owners surveyed are making an important contribution to driving sustainable investment through the investment market as a whole. By explaining how they account for these issues in their investment processes and in their outsourcing to external investment managers, they are demonstrating that not only are they concerned about sustainability-related issues but that they are prepared to take effective action on these issues. This, in turn, creates strong incentives for investment managers to take account of these issues in their investment practices and processes, and for companies to improve their policies, practices, performance and reporting on sustainability-related issues. The results of this exercise – which focused on practices, and in how they apply these high-level leading asset owners - can be taken as a proxy for commitments to a specific issue such as climate how far institutional investors have come, and how change. far they still have to go. The asset owners surveyed Our hope is that this checklist will support asset do a good job of describing themselves and their owners in their reporting and, critically, in their mandates, and of their overarching approaches to implementation of sustainable investment. It sustainable investment. However, they provide provides a practical framework for action and, for relatively little detail on how they actually asset owners starting on their sustainable investment incorporate or embed these practices in their journey, it can be used as a gap analysis tool to investment portfolios, in the manner in which they identify those areas where action might be required. mandate their external managers to follow such SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 31 SECTION TITLE 32 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | LONG-TERM FINANCE APPENDIX 1: THE CHECKLIST IN DETAIL Section 1. About the Organisation 1.1 History and context 1.1.1 Has the organisation provided an overview of its history including the reasons for its creation? 1.1.2 Has the organisation explained the origins of its wealth (i.e. how it is funded)? 1.1.3 Has the organisation described its ownership structure? 1.2 Mission and mandate 1.2.1 Has the organisation described its overarching mission and objectives? 1.2.2 Has the organisation described the legal and other obligations that apply to it? Note: These include sustainability- related obligations, and other obligations that affect its approach to sustainability. 1.3 Finance and governance 1.3.1 Has the organisation published an annual report describing its overall performance and strategy? 1.3.2 Has the organisation reported on its investment performance over at least three years? 1.3.3 Has the organisation published details of its overall governance structure? 1.3.4 Has the organisation published the names of its board of directors? 1.3.5 Has the organisation published the names of its senior management team? 1.4 Assets under management 1.4.1 Has the organisation stated its total assets under management? 1.4.2 By asset class? 1.4.3 By geography (domestic versus international)? 1.4.4 By whether the assets are internally or externally managed? 1.4.5 By whether the assets are actively or passively managed? 1.4.6 In terms of the proportion that are covered by ethical screens? 1.4.7 In terms of the proportion that are covered by active ownership strategies? 1.4.8 In terms of the proportion where sustainability-related issues are explicitly integrated into the investment research and decision-making process? 1.4.9 In terms of the proportion that are invested in sustainability-related areas? 1.5 Reporting 1.5.1 Has the organisation had its sustainable investment-related reporting assured or otherwise reviewed by an external party? SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 33 Section 2: Sustainable Investment Strategy and Governance 2.1 Investment beliefs 2.1.1 Has the organisation published its investment beliefs? 2.1.2 Do the investment beliefs set out the organisation’s views on the relevance of sustainability to its investment practices, processes and performance? 2.1.3 Does the organisation explain how sustainability-related issues create long-term investment value? 2.1.4 Does the organisation define what it means by ‘long term’? 2.2 Investment strategy 2.2.1 Has the organisation described its investment strategy, explaining how it will deliver on its investment beliefs? 2.2.2 Has the organisation explained how sustainability is integrated into its risk management processes? 2.2.3 Has the organisation identified its material sustainability-related issues? 2.3 Investment objectives 2.3.1 Does the organisation specify its investment objectives, e.g. by highlighting the benchmarks it uses to track and assess performance? 2.3.2 Does the organisation specify the timeframes over which it assesses performance? 2.4 Policy 2.4.1 Has the organisation published an overarching sustainable investment policy or similar document? If yes, does the policy: 2.4.2 Specify the coverage of the policy (in terms of the asset classes and AUM covered by the policy)? 2.4.3 Identify any exceptions to the policy? 2.4.4 Describe the integration of sustainability-related issues into its investment decision-making? 2.4.5 Describe the organisation’s approach to active ownership/engagement? 2.4.6 Describe the organisation’s approach to voting its listed equities holdings (if relevant)? 2.4.7 Describe the organisation’s approach to climate change? 2.4.8 Has the organisation published a policy on managing conflicts of interest in its investment process? 2.5 Stakeholder Engagement 2.5.1 Has the organisation identified its key stakeholders? 2.5.2 Has it indicated which of these it has engaged with? 2.5.3 Has it identified the key issues raised by these stakeholders and the actions taken as a result? 2.6 Objectives and Targets 2.6.1 Has the organisation published objectives and targets for its sustainable investment activities? 2.6.2 Are the objectives and targets SMART (specific, measurable, achievable, realistic, time bound)? 2.6.3 Has the organisation explained how the targets are to be achieved? 2.6.4 Has the organisation set key performance indicators (KPIs) to assess progress towards the targets? 2.6.5 Has the organisation reported on progress against the targets? 2.6.6 Has the organisation described the factors that have affected its performance against these targets? APPENDIX 1: THE CHECKLIST IN DETAIL 34 2.7 Responsibilities and Accountabilities 2.7.1 Has the organisation specified who is responsible for oversight of the sustainable investment policy? 2.7.2 Has the organisation specified who is responsible for implementation of the sustainable investment policy? 2.7.3 Has the organisation stated who is responsible for the delivery of the targets? 2.7.4 Has the organisation described how sustainable investment is incorporated in performance management and reward processes? 2.7.5 Has the organisation described how sustainable investment is incorporated in personal development processes (e.g. training)? 2.8 Promoting Sustainable Investment 2.8.1 Has the organisation listed the sustainable investment initiatives it is a member of/signatory to? 2.8.2 Has the organisation listed the sustainability-related codes and other commitments it has made? 2.9 Public Policy Engagement 2.9.1 Has the organisation reported on its dialogue with public policy makers or regulators in support of sustainable investment? 2.9.2 Has the organisation published copies of the sustainable investment-related submissions it has made to governments, regulators or public policy-makers? 2.10 Asset Allocation 2.10.1 Has the organisation undertaken sustainability-related scenario analysis and/or modelling? 2.10.2 If yes, has it provided a description of the scenario analysis? 2.10.3 Has the organisation described whether and how it considers sustainability issues in asset allocation decisions? 2.10.4 Has the organisation indicated the percentage of its total AUM invested in sustainability-themed areas? 2.10.5 Has the organisation reported on the overall sustainability performance and impact of its investment portfolio? Section 3: Sustainable Investment by Asset Class 3.1 Investment 3.1.1 Does the organisation describe its approach to assessing and managing sustainability-related issues in the asset class? Note: This may be screening, best in class, enhanced analysis. 3.1.2 Does the organisation describe any variations in its approach across the asset class? 3.1.3 Does the organisation describe how its approach affects its investment decisions (e.g. narrowed the investment universe, influenced buy-sell decisions)? 3.1.4 Does the organisation describe how its approach affects the composition of its portfolio? 3.1.5 Does the organisation describe how its approach has affected its financial performance or the financial characteristics (e.g. tracking error) of its portfolio? 3.1.6 Does the organisation describe how its approach has affected the sustainability performance of its portfolio? Does the organisation disclose: 3.1.7 All of its holdings in the asset class? 3.1.8 The percentage of the asset class in sustainability-related investments? 3.1.9 The sustainability-related characteristics of the asset class? SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 35 3.2 Active Ownership 3.2.1 Does the organisation describe how it engages with the companies/entities/assets in which it is invested? 3.2.2 Does the organisation describe how this engagement has influenced the sustainability-related performance of these companies/entities/assets? Does the organisation provide data on 3.2.3 The number of engagements carried out? 3.2.4 The engagement strategies/approaches used? 3.2.5 The proportion of the portfolio covered by engagement? 3.2.6 The subjects (topics) of engagement? 3.2.7 The objectives of its engagement? 3.2.8 The outcomes (i.e. changes in company practice) achieved from engagement? 3.3 Voting (listed equity) 3.3.1 Does the organisation specify the shareholder meetings at which it voted its shares? 3.3.2 Does the organisation report on the number of votes for and against management, and the number abstained? 3.3.3 Does the organisation comment on the reasons for abstentions and votes against management? 3.3.4 Does the organisation comment on the outcomes (i.e. changes in company practice) achieved through voting? Section 4: Other Asset Classes 4.1 Does the organisation describe its approach to sustainable investment in other asset classes? 4.2 Does it describe how it assesses and manages sustainability-related issues in these asset classes? 4.3 Does it describe how it engages with the companies/entities/assets in these asset classes? 4.4 Does it describe the sustainability-related characteristics of these asset classes? 4.5 Does it list its holdings in these asset classes? Section 5: Delegated Investment 5.1 General 5.1.1 Does the organisation describe how sustainability-related issues are managed by its external investment managers? 5.1.2 Does the organisation specify the sustainability-related strategies (e.g. screening, integration) that are to be applied by its external investment managers? 5.1.3 Does it explain how these differ between investment managers or between asset classes? 5.1.4 Does the organisation describe how its investment managers are rewarded for their sustainability-related performance? 5.1.5 Does the organisation explain how rewards and incentives align with its investment beliefs, policies and objectives? APPENDIX 1: THE CHECKLIST IN DETAIL 36 5.2 Manager Selection 5.2.1 Does the organisation describe the sustainability-relate information it typically reviews when selecting external investment managers? 5.2.2 Does the organisation explain how sustainability-related information is incorporated into manager selection processes? 5.2.3 Does the organisation specify what proportion of manager selection processes take account of sustainability- related information? 5.2.4 Does the organisation explain how sustainability-related information has influenced decisions on manager selection 5.2.5 Does the organisation explain how these decisions differ from those that would otherwise have been made? 5.3 Manager Appointment 5.3.1 Does the organisation describe how sustainability-related issues are incorporated into manager requirements (e.g. mandates)? Does the organisation describe: 5.3.2 The investment performance benchmarks (or other expectations) it sets for its external investment managers? 5.3.3 The sustainability-related performance objectives (or other expectations) it sets for its external investment managers? 5.3.4 The sustainability-related incentives it provides to its external investment managers? 5.3.5 The sustainability-related reporting it requires from its investment managers? 5.3.6 The actions it takes if investment managers do not meet their contractual obligations or do not perform in line with the organisation’s policies and other commitments? 5.4 Manager monitoring 5.4.1 Does the organisation describe how it monitors and reviews the sustainability-related performance of its external investment managers? 5.4.2 Does the organisation report on the sustainability-related performance of its external managers? Section 6: Climate Change 6.1 Governance 6.1.1 Has the organisation described its board oversight of climate-related risks and opportunities? 6.1.2 Has the organisation described management’s role in assessing and managing climate-related risks and opportunities? 6.2 Strategy 6.2.1 Has the organisation described the climate-related risks and opportunities it has identified? 6.2.2 Has the organisation described the impact of climate-related risks and opportunities on its investments and on its businesses, strategy and financial planning? 6.2.3 Has the organisation described the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario? 6.2.4 • Has the organisation described the scenarios it has used in its modelling? 6.2.5 • Has it described the results of its modelling? 6.2.6 • Has it explained how the results of the modelling have influenced its investment decisions? SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 37 6.3 Risk Management 6.3.1 Has the organisation described its processes for identifying and assessing climate-related risks? 6.3.2 Has the organisation described its processes for managing climate-related risks? 6.3.3 Has the organisation described how processes for identifying, assessing and managing climate-related risks are integrated into its overall risk management processes? 6.4 Metrics and Targets 6.4.1 Has the organisation described the metrics it uses to assess climate-related risks and opportunities in line with its strategy and risk management process? 6.4.2 Has the organisation disclosed its portfolio-related Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks? 6.4.3 Has the organisation indicated the percentage of its total AUM in investments that support the low carbon transition? 6.4.4 Has the organisation indicated the percentage of its total AUM in investments that support effective adaptation? 6.4.5 Has the organisation described the targets it uses to manage climate-related risks and opportunities, and its performance against the targets? APPENDIX 1: THE CHECKLIST IN DETAIL 38 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | LONG-TERM FINANCE ENDNOTES 1. See, for example, the country case studies and analysis prepared as part of the UNEP FI, the PRI and The Generation Foundation’s Fiduciary Duty in the 21st Century project: https://www.fiduciaryduty21. org/publications.html 2. https://www.worldbank.org/en/news/press-release/2017/10/11/world-bank-group-and-gpif-join-forces- to-mobilize-capital-markets-for-sustainable-investments 3. https://www.worldbank.org/en/news/press-release/2019/04/08/world-bank-group-and-gpif-deepen- partnership-on-building-sustainable-capital-markets 4. Inderst, G. and Stewart, F. (2018), Incorporating Environmental, Social and Governance Factors into Fixed Income Investment (World Bank, Washington DC), https://openknowledge.worldbank.org/ bitstream/handle/10986/29693/125442-WP-PUBLIC.pdf?sequence=5&isAllowed=y 5. Stewart, F. and Kawai, E. (2019), Public Pension Fund Governance and Investment: Lessons from Asia (World Bank, Washington DC). 6. For a recent review, see Sullivan, R., Martindale, W., Feller, E., Pirovska, M. and Elliott, R. (2019), Fiduciary Duty in the 21st Century: Final Report (The Generation Foundation, PRI and UNEP FI, London). https://www.unpri.org/download?ac=9792 7. UN Commission on Trade and Development (UNCTAD) (2014), World Investment Report 2014. Investing in the SDGs: An Action Plan (UNCTAD, Geneva), https://unctad.org/en/PublicationsLibrary/ wir2014_en.pdf 8. Martindale, W., Sullivan, R. and Fabian, N. (2016), How Asset Owners Can Drive Responsible Investment: Beliefs, Strategies and Mandates (Principles for Responsible Investment, London), https://www.unpri.org/download?ac=1398 9. For example, in their 2016 report on investor duties in Asia, the UNEP FI, the PRI and The Generation Foundation noted: “… the 2015 amendment to the South Korean National Pension Service Act requires the National Pension Service to take account of ESG factors in its investment processes or to explain why it is not doing so. This has led the National Pension Service to start monitoring investment managers’ approach to integrating ESG factors. In turn, local investment managers have started to develop their ESG capabilities in order to bid for contracts.”, and “[GPIF’s decision to sign the Principles for Responsible Investment, to support the Japanese Stewardship Code and to invest in ESG indices has]… sent a positive market signal about the expected capacity and approach of institutional investors…GPIF’s position and scale gives it a special capacity and role in influencing the formation of market norms… Its activities should provide strong encouragement to other Japanese asset owners, particularly public plans, to explore ESG integration and responsible investment.” See, further, Sullivan, R., Feller, E., Martindale, W. and Robinson, J. (2016), Investor Duties and Obligations in 6 Asian Markets (Principles for Responsible Investment, UNEP Finance Initiative and The Generation Foundation, London), https:// www.unpri.org/download?ac=1393 SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 39 10. See, for example, the country case studies and analysis prepared as part of the UNEP FI, the PRI and The Generation Foundation’s Fiduciary Duty in the 21st Century project: https://www.fiduciaryduty21. org/publications.html 11. https://www.unpri.org/signatories/reporting-for-signatories 12. Sullivan, R., Czyz, K. and Dembele, F. (2019), Applying the Long-View to Investment Funds: Introducing the Long-term Disclosure Framework (Cambridge Institute for Sustainability Leadership (CISL), Cambridge), https://www.cisl.cam.ac.uk/resources/publication-pdfs/long-term-disclosure- framework-18-march.pdf. See also the predecessor report Lake, R. and Oulton, W. (2016), Taking the Long View: A Toolkit for Long-term, Sustainable Investment Mandates (CISL, Cambridge), https:// www.cisl.cam.ac.uk/resources/publication-pdfs/taking-the-long-view-ilg-mandates-report.pdf. 13. https://www.swfinstitute.org/research/linaburg-maduell-transparency-index 14. TCFD (2017), Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures, https://www.fsb-tcfd.org/publications/final-recommendations-report/ 15. See, generally, https://www.cdp.net/en/guidance/guidance-for-companies#6c84d1acb017e380e18853a d8966994a. See also CDP (2019), CDP Technical Note: Reporting Guidance for Financial Services sector companies responding to CDP. CDP Climate Change Questionnaire 2019 (CDP, London), https://6fefcbb86e61af1b2fc4-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/ guidance_docs/pdfs/000/001/785/original/CDP-technical-note-financial-services.pdf?1547640542. 16. https://aodproject.net/ratings/ 17. de Bakker, L., Eekhof, S., Jonker, D. and Duiker. J. (2019), Benchmark Responsible Investment by Pension Funds in the Netherlands 2019 (VBDO, Utrecht), https://www.vbdo.nl/wp-content/ uploads/2019/11/VBDO-BM-PF-2019-1.pdf 18. https://www.responsible-investor.com/articles/ri-reporting-awards-2018-wins-for-abp-swedfund- kempen-and-sonen. 19. https://fund.nps.or.kr/jsppage/fund/mpc_e/mpc_e_08.jsp 20. https://www.nbim.no/en/the-fund/about-the-fund/ 21. https://fund.nps.or.kr/jsppage/fund/ifm_e/mpc_e_01.jsp 22. https://fund.nps.or.kr/jsppage/fund/ifm_e/mpc_e_01.jsp 23. https://www.frtib.gov/ReadingRoom/index.html 24. GPIF (2018), ESG Report 2018 (GPIF, Tokyo),page 5, https://www.gpif.go.jp/en/investment/190905_ Esg_Report.pdf 25. GPIF (2018), Annual Report Fiscal Year 2017 (GPIF, Tokyo), https://www.gpif.go.jp/en/annual_report_ fiscal_year_2017.pdf, p. 51. 26. GPIF (2018), ESG Report 2018 (GPIF, Tokyo),page 6, https://www.gpif.go.jp/en/investment/190905_ Esg_Report.pdf 27. http://www.cppib.com/en/how-we-invest/global-perspective/ ENDNOTES 40 28. https://duurzaambeleggen.jaarverslagpfzw.nl/ 29. https://www.calpers.ca.gov/docs/board-agendas/201801/full/day1/02-esg-overview-presentation.pdf, page 3 and https://www.calpers.ca.gov/page/about/organization/calpers-story/our-mission-vision. 30. https://www.nbim.no/en/publications/expectation-documents/ 31. http://www.cppib.com/content/dam/cppib/Who%20We%20Are/Governance/Policies/Responsible_ Investing_Policy_August2010.pdf and http://www.cppib.com/documents/1581/Code_of_Conduct_ EN.pdf 32. https://duurzaambeleggen.jaarverslagpfzw.nl/ 33. GPIF (2018), ESG Report 2018 (GPIF, Tokyo),page 40, https://www.gpif.go.jp/en/investment/190905_ Esg_Report.pdf 34. https://www.calpers.ca.gov/page/investments/sustainable-investments-program/esg-integration and https://www.calpers.ca.gov/docs/global-equity-sustainable-investment-guidelines.pdf 35. https://www.abp.nl/images/belangrijke-externe-managers.pdf 36. ABP (2019), Sustainable and Responsible Investment 2018, pp. 34 and 65, https://www.abp.nl/images/ responsible-investment-report-2018.pdf 37. https://www.gpif.go.jp/en/investment/trucost_report_en.pdf SUSTAINABLE INVESTMENT: BEST PRACTICE DISCLOSURE CHECKLIST 41