Implementation Statement

Covance CRU – year to 31 October 2023

Implementation Statement

The Trustees of the Covance Clinical Research Unit Limited Pension Scheme (the ‘Trustees’ and the ‘Scheme’ respectively) have prepared this implementation statement in compliance with the governance standards introduced under The Occupational Pension Schemes (Investment and Disclosure) (Amendment) Regulations 2019.

Its purpose is to describe the actions taken over the past year and to demonstrate how the Trustees have followed the policy on voting, stewardship and engagement as set out in the Scheme’s Statement of Investment Principles (the ‘SIP’), dated February 2023. This statement covers the period to 31 October 2023.

The Scheme’s assets are held in pooled investment funds (via the Mobius Life investment platform) and the day-to-day management of these investments (including the responsibility for voting and engaging with companies) is delegated to the fund managers of the pooled investment funds (the ‘Fund Managers’).

The Fund Managers of the pooled investment funds are Legal & General Investment Management (‘LGIM’), Capital International Management Company Sàrl (‘Capital Group’), Schroder Investment Management Limited (‘Schroders’) and Columbia Threadneedle Investments (‘CT’).

As Trustees of the Scheme’s assets, we are responsible for the selection and retention of the funds accessed via Mobius. Reviewing the voting and engagement activities, for which we include details below, is an important exercise to help us ensure they remain appropriate and are consistent with the Fund Managers’ stated policies in this regard.

We are satisfied with the voting and engagement activities of the Fund Managers, and in particular, that they are using their position as stakeholder to engage constructively with investee companies; however, we will engage with the Fund Managers should we have any concerns about the voting and/or engagement activities carried out on our behalf.

The Trustees had no cause to challenge the Fund Managers’ voting and/or engagement activities during the year to 31 October 2023. We highlight below some of the key activities/changes during the year.

Changes to investment strategy

During the year to 31 October 2023, the Trustees made the following changes to the investment strategy:

In February 2023 the Trustees agreed to update the Trigger Governance Framework (TGF), reduce the allocation to the LGIM Short-Dated Sterling Corporate Bond Index Fund and use the proceeds to invest in LDI to increase the interest rate hedge ratio relative to the long term solvency target, to broadly be equal to the inflation hedge ratio, whilst ensuring an appropriate level of liquidity is maintained in the Scheme; and
The Scheme reached three funding level triggers in February, March and August 2023, which involved switching assets from the growth asset allocations to the LDI and short dated corporate bond allocations, in order to reduce investment risk and increase the Scheme’s protection against both interest rates and inflation.

All of the changes to the investment strategy detailed above were based on advice received from the appointed investment consultant.

Voting and engagement

The Trustees’ policy, as set out in the SIP, is to consider only factors that are expected to have a financial impact on the Scheme’s investments. Details on significant voting and engagement activities provided by the Fund Managers are set out below.

In order to produce this statement we have asked the Fund Managers a series of questions on their policies, actions and for examples relating to their voting and engagement activities during the year and in conjunction with our advisers, have identified significant voting and engagement activities (i.e. those most relevant to the Trustees’ policy). We have then reviewed these and selected the most relevant comments for the purpose of this statement.

The Fund Managers report on this on a quarterly basis, therefore the information provided covers the year to 30 September 2023 unless otherwise stated.

LGIM and Capital Group have provided information relating to the Global Equity Market Weights (30:70) Index Fund – 75% GBP Currency Hedged and Emerging Markets Total Opportunities Fund respectively, as these fund holds equities for which they have voting rights. The LGIM Short Dated Sterling Corporate Bond Index Fund does not hold equities and given that these investments do not confer voting rights, there was no voting carried out in relation to this fund.

The Schroders structured equity product invests in equity derivatives and therefore does not hold physical equities and given that these investments do not confer voting rights, there was no voting carried out in relation to this fund.

The CT Dynamic LDI Funds (including the equity-linked and credit-linked funds) do not hold physical equities and given that these investments do not confer voting rights, there was no voting carried out in relation to these funds. The primary underlying counterparty for the LDI fund assets is the UK government; however the derivatives used mean the funds will also have exposure to clearing houses and investment banks. However, CT does undertake engagement activities with counterparty banks on relevant issues, where applicable, and we have included examples below. CT report on this on a bi-annual basis, therefore the information provided covers the year to 30 June 2023.

LGIM - voting and engagement activities

The following commentary is based on the information that LGIM have provided in response to our questions and illustrates how they co-ordinate their voting and engagement activities with companies.

‘LGIM’s voting and engagement activities are driven by ESG professionals and their assessment of the requirements in these areas seeks to achieve the best outcome for all our clients. Our voting policies are reviewed annually and take into account feedback from our clients.

Every year, LGIM holds a stakeholder roundtable event where clients and other stakeholders (civil society, academia, the private sector and fellow investors) are invited to express their views directly to the members of the Investment Stewardship team. The views expressed by attendees during this event form a key consideration as we continue to develop our voting and engagement policies and define strategic priorities in the years ahead. We also take into account client feedback received at regular meetings and/ or ad-hoc comments or enquiries.

All decisions are made by LGIM’s Investment Stewardship team and in accordance with our relevant Corporate Governance & Responsible Investment and Conflicts of Interest policy documents which are reviewed annually. Each member of the team is allocated a specific sector globally so that the voting is undertaken by the same individuals who engage with the relevant company. This ensures our stewardship approach flows smoothly throughout the engagement and voting process and that engagement is fully integrated into the vote decision process, therefore sending consistent messaging to companies.

LGIM’s Investment Stewardship team uses ISS’s ‘ProxyExchange’ electronic voting platform to electronically vote clients’ shares. All voting decisions are made by LGIM and we do not outsource any part of the strategic decisions. Our use of ISS recommendations is purely to augment our own research and proprietary ESG assessment tools. The Investment Stewardship team also uses the research reports of Institutional Voting Information Services (IVIS) to supplement the research reports that we receive from ISS for UK companies when making specific voting decisions.

To ensure our proxy provider votes in accordance with our position on ESG, we have put in place a custom voting policy with specific voting instructions. These instructions apply to all markets globally and seek to uphold what we consider are minimum best practice standards which we believe all companies globally should observe, irrespective of local regulation or practice.

We retain the ability in all markets to override any vote decisions, which are based on our custom voting policy. This may happen where engagement with a specific company has provided additional information (for example from direct engagement, or explanation in the annual report) that allows us to apply a qualitative overlay to our voting judgement. We have strict monitoring controls to ensure our votes are fully and effectively executed in accordance with our voting policies by our service provider. This includes a regular manual check of the votes input into the platform, and an electronic alert service to inform us of rejected votes which require further action.

We also believe public transparency of our vote activity is critical for our clients and interested parties to hold us to account. In determining significant votes, LGIM’s Investment Stewardship team takes into account the criteria provided by the Pensions & Lifetime Savings Association consultation (PLSA).’

LGIM Global Equity Market Weights (30:70) Index Fund – 75% GBP Currency Hedged

LGIM voted on 71,828 resolutions. Votes: For 81%, Against 18%, Abstained <1%. There were 1,261 engagements over the year in relation to this fund. The majority of engagements were made regarding financials.

The Trustees have reviewed LGIM’s voting activity and in conjunction with their adviser, Cartwright, on the Trustees’ behalf, have identified the following as the most significant votes from the perspective that they potentially have the biggest financial impact on the Scheme, as set out in the SIP.

1. SHELL PLC

Date: 23/05/2023

Resolution: Approve the Shell Energy Transition Progress

Vote: Against (Against management recommendation)

“LGIM is publicly supportive of so called "Say on Climate" votes. We expect transition plans put forward by companies to be both ambitious and credibly aligned to a 1.5°C scenario. Given the high-profile of such votes, LGIM deem such votes to be significant, particularly when LGIM votes against the transition plan.

A vote against is applied, though not without reservations. We acknowledge the substantial progress made by the company in meeting its 2021 climate commitments and welcome the company’s leadership in pursuing low carbon products. However, we remain concerned by the lack of disclosure surrounding future oil and gas production plans and targets associated with the upstream and downstream operations; both of these are key areas to demonstrate alignment with the 1.5°C trajectory.”

2. GLENCORE PLC

Date: 26/05/2023

Resolution: In respect of the Next Climate Action Transition Plan”

Vote: For (Against management recommendation)

“LGIM considers this vote to be significant as LGIM co-filed this shareholder resolution as an escalation of our engagement activity, targeting some of the world's largest companies on their strategic management of climate change.

Therefore, LGIM has co-filed this shareholder proposal (alongside Ethos Foundation) at Glencore’s 2023 AGM, calling for disclosure on how the company’s thermal coal production plans and capital allocation decisions are aligned with the Paris objectives. This proposal was filed as an organic escalation following our multi-year discussions with the company since 2016 on its approach to the energy transition.”

3. EXXON MOBIL CORPORATION

Date: 31/05/2023

Resolution: Calling for a Report on Asset Retirement Obligations Under IEA Net Zero Emissions Scenario

Vote: For (Against management recommendation)

Together with CBIS, LGIM has co-filed a shareholder resolution asking for more transparency on the retirement costs of Exxon’s asset base. In our view, this is a highly relevant and financially material matter, and by filing this proposal we are seeking greater clarity into the potential costs Exxon may incur in the event of an accelerated energy transition.”

Schroders - engagement activities

The following commentary is based on the information that Schroders have provided in response to our questions and illustrates how they co-ordinate their engagement activities with companies. These examples provide evidence that they are engaging actively with the companies they invest in on behalf of the Scheme.

‘We take responsible investment seriously. The identification of financially material environmental, social and governance (ESG) issues forms part of our investment process, helping us to manage risk and support long-term returns. Beyond the management of opportunity and risk, we also see responsible investing and broader investment stewardship activities as part of our duty as an investor acting in the best interest of our clients, and as a participant in the global financial system.

LDI portfolios are very different to traditional equity or bond portfolios and so our engagement programme primarily focuses on trading counterparties and clearing members. This engagement work is structured both in terms of prioritisation (both in terms of companies to whom we have the greatest exposure and to companies whom we feel have the greatest ESG deficiencies) and in terms of progress monitoring against predefined milestones.’

Schroders Structured Equity

These funds contain equity options and do not hold any physical equity investments and are therefore not eligible to vote. However, Schroders does still engage with counterparty banks on relevant issues.

They have provided the following wording and engagement example:

“Counterparty risk, including ESG factors, is assessed and monitored by the centralised Group Credit Risk Team. The Risk Managed Investments (RMI) team defer ESG assessment to this team. RMI have built a diverse panel of counterparties with which to trade the OTC derivatives with. All counterparties are contracted under ISDA. The team will not engage in trading with a bank until the relevant ISDA documentation has been signed by both the bank’s and Schroders’ Legal departments, and the counterparty approved by Group Credit Risk.

ESG factors are taken into consideration when selecting counterparties to trade derivatives with (at Group Credit Risk level). ESG assessment is done at the counterparty level (alongside standard financial and reputational risk analysis) by the Group Credit Risk team. This is done at the point of on-boarding a new counterparty and at the annual review process.

As a specific case study, HSBC Plc is both a counterparty and service provider to Schroders Solutions. Whilst the RMI team do not invest in HSBC directly, the trading activity undertaken could contribute to the profit pool of HSBC that can be utilised for investment purposes by HSBC. It should be noted that other teams have much more influence given they actually invest in HSBC equity and/or bonds.

Over the last 12 months, several conversations (including in person ‘Business Breakfasts’ focussing on ESG topics hosted by HSBC) have taken place. The collaborative conversations and meetings not only look at pricing and liquidity of ESG derivative exposures, but also broader trends so we can better service our clients’ requirements in this space.”

Capital Group - voting and engagement activities

The following commentary is based on the information that Capital Group have provided in response to our questions and illustrates how they co-ordinate their voting and engagement activities with companies.

‘Capital Group do not follow proxy advisors' recommendations. Each proxy ballot is reviewed by the Governance and Proxy (GAP) team at Capital Group who facilitate the proxy voting process. They rely primarily on their own proprietary research in evaluating companies although, to provide supplementary analysis of resolutions at shareholder meetings, they will often review proxy research from third party vendors.

We prefer to engage with companies privately – given our size, fundamental research-based approach to investing and global footprint, we find that constructive engagement is most effective when we directly tackle key issues with companies and their boards.

We typically collaborate with other asset managers through our industry memberships on initiatives to improve the framework for universal investors. For example, the UK Investor Forum – which we are founding members of – helps collective engagement. Through such organisations, we can have a collective impact in certain situations where we believe this will achieve better outcomes for our clients.’

Capital Group Emerging Markets Total Opportunities Fund

Capital Group voted on 1,734 resolutions. Votes: For 94%, Against 5%, Abstained 1%. There were 40 engagements over the year in relation to this fund.

The Trustees have reviewed Capital Group’s voting activity and in conjunction with their adviser, Cartwright, on the Trustees’ behalf, have identified the following as the most significant votes from the perspective that they potentially have the biggest financial impact on the Scheme, as set out in the SIP:

1. PHILIP MORRIS INTERNATIONAL INC.

Date: 03/05/2023

Resolution: Disclose Nicotine Level Information, and Reduce Nicotine Levels in Tobacco Products

Vote: Against

We deem the company's existing approach to adequately cover a significant portion of the issues outlined.

2. CARLSBERG A/S

Date: 31/03/2023

Resolution: Report on Efforts and Risks Related to Human Rights

Vote: Against

The proposed shareholder resolution is considered to be too prescriptive.

3. CHINA RESOURCES GAS GROUP LIMITED

Date: 25/05/2023

Resolution: Approve Issuance of Equity or Equity-Linked Securities without Preemptive Rights

Vote: Against

Proposed share issuance is too high.

The Trustees have reviewed Capital Group’s engagement activity in conjunction with their adviser, Cartwright, and the following has been identified as the most significant example of engagement from the perspective that it potentially has the biggest financial impact on the Scheme, as set out in the SIP:

TOTALENERGIES SE

“Based in Europe, TotalEnergies is one of the world’s largest integrated energy, oil and gas companies. For these companies, navigating the energy transition is a key strategic and operational challenge. There has been increased regulatory pressure for clear and realistic emission-reductions target-setting, particularly in Europe. As investors in oil and gas companies, our analysts need to better understand each company’s plans for emission reduction and their impacts.

Action:

In November 2022, our ESG and investment analysts engaged with TotalEnergies to:

Better understand the company’s emissions targets and plans.
Evaluate the company’s focus on emissions reductions in areas that it can control, specifically its Scopes 1 and 2 emissions, as these arise from the company’s own operations.
Encourage improved disclosure on the use of carbon offsets within its plans. Best practice is to use offsets only when further operational efficiency is not viable and for offsets to be of high quality.

Outcome:

TotalEnergies confirmed its focus on Scopes 1 and 2 emissions, with a target of 40% reduction by 2030. This aligns with the IEA’s net-zero scenario² for the energy sector. The company shared that reductions will come primarily from operational efficiencies¹. However, it believes that offsetting is needed to achieve net zero and will use a nature-based solution. The engagement enhanced the analysts’ confidence in TotalEnergies’ ability to address the risks posed around the energy transition for energy majors. The analysts will continue to engage on rollout of energy efficiency measures across operations and the use of carbon offsets, and will monitor progress.”

CT - engagement activities

The following commentary is based on the information that CT have provided in response to our questions and illustrates how they co-ordinate their engagement activities with companies. These examples provide evidence that they are engaging actively with the companies they invest in on behalf of the Scheme.

Our approach is aligned with the core values and beliefs of the wider Financial Group, and draws on national and international codes and standards for responsible investment and ownership, including the United Nations Principles for Responsible Investment, to which we are a founder signatory.

CT Dynamic LDI Funds

These funds contain investments that provide exposure to long dated interest rates / inflation. They do not hold any physical equity investments and are therefore not eligible to vote. However, CT does still engage with counterparty banks on relevant issues.

There were 11 engagements over the year. The majority of engagements were made regarding climate change.

The Trustees have reviewed CT’s engagement activity and in conjunction with their adviser, Cartwright, have identified the following as the most significant example of engagement from the perspective that they potentially have the biggest financial impact on the Scheme, as set out in the SIP:

1. HSBC HOLDINGS PLC

‘HSBC has updated its energy policy to include the ending of funding for new oil and gas projects. In particular it states:

HSBC will not provide new finance, or new advisory services, to any client for the specific purposes of O&G exploration, appraisal, development, and production pertaining to:

ultra-deepwater offshore O&G projects;
shale oil projects; extra heavy oil projects;
projects in environmentally and socially critical areas; or
infrastructure whose primary use is in conjunction with the above activities.’

2. BARCLAYS PLC

‘The company announced that it was accelerating its timeline to phase out the financing of thermal coal power in the US from 2035 to 2030, in line with its approach in the UK and EU. The decision was taken as a result of engagement with shareholders and the introduction of the Inflation Reduction Act in the US.’