Implementation Statement

Covance CRU – year to 31 October 2024

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 Plans (Investment and Disclosure) (Amendment) Regulations 2019.

Its purpose is to describe actions taken over the past year and to demonstrate how the Trustees have followed their policy on voting, stewardship and engagement, as set out in the Scheme’s Statement of Investment Principles (the “SIP”), dated July 2024. This Statement covers the year to 31 October 2024.

The Scheme’s assets are held in pooled investment funds (held 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 managers of those pooled investment funds (the “Fund Managers”).

The Fund Managers of the pooled investment funds are Legal & General Investment Management (“LGIM”), M&G Investments (“M&G”), BNY Mellon Investment Management (“BNYM”), Columbia Threadneedle Investments (“CT”), and Insight Investment Funds Management Limited (“Insight”).

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 2024. We highlight below some of the key activities/changes during the year.

Changes to investment strategy

During the year to 31 October 2024, the Trustees made the following changes to the investment strategy:

The Trustees implemented a new portfolio in June 2024 with reduced market risk that targets enough asset growth potential to reach buy-in within 5 years.
Concentration risk was mitigated by introducing LDI portfolios with 2 different Fund Managers.
The structured equity mandate was liquidated and replaced with a lower allocation to a simpler/cheaper index-tracking equity fund with a tilt towards ESG factors.
The revised strategy comprises higher levels of liquidity and an increased level of LDI resilience to satisfy The Pensions Regulator’s market stress buffer test.
The Trigger Governance Framework was updated to outline a de-risking plan that involves reducing equity exposure as the funding level improves and using the proceeds to invest in LDI, thereby increasing the interest rate hedge ratio relative to the long term solvency target.

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 and actions, and to provide 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 2024 unless otherwise stated.

LGIM have provided information relating to the Future World Global Equity Fund, as this fund holds equities for which they have voting rights.

The M&G Total Return Credit Investment Fund and the BNY Mellon Global Dynamic Bond Fund do not hold equities and given that bonds do not confer voting rights, there was no voting carried out in relation to these funds. However, M&G and BNY Mellon do undertake engagement activities in respect of their bond holdings and we have included examples below.

The LDI Funds, namely the two CT Regular Profile Unleveraged Gilt Funds, the CT Credit-Linked Real Dynamic LDI Fund, and the two Insight Enhanced Selection LDI Funds, do not hold 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 and Insight do 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 for the CT LDI Funds covers the year to 30 June 2024.

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 Future World Global Equity Fund

LGIM voted on 55,162 resolutions. Votes: For 80%, Against 19%, Abstained <1%. There were 2,168 engagements over the year in relation to this fund. The majority of engagements were made regarding environmental topics.

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. MICROSOFT CORPORATION

Date: 07/12/2023

Resolution: Elect Director Satya Nadella

Vote: Against (Against management recommendation)

“A vote against is applied as LGIM expects companies to separate the roles of Chair and CEO due to risk management and oversight concerns.”

2. APPLE INC.

Date: 28/02/2024

Resolution: Report on Risks of Omitting Viewpoint and Ideological Diversity from EEO Policy

Vote: Against (Against management recommendation)

“A vote against this proposal is warranted, as the company appears to be providing shareholders with sufficient disclosure around its diversity and inclusion efforts and nondiscrimination policies, and including viewpoint and ideology in EEO policies does not appear to be a standard industry practice.”

3. AMAZON.COM, INC

Date: 25/04/2023

Resolution: Report on Customer Due Diligence

Vote: For (In line with management recommendation)

“This shareholder resolution is considered significant as one of the largest companies and employers not only within its sector but in the world, we believe that Amazon’s approach to human capital management issues has the potential to drive improvements across both its industry and supply chain. LGIM voted in favour of this proposal last year and continue to support this request, as enhanced transparency over material risks to human rights is key to understanding the company’s functions and organisation. While the company has disclosed that they internally review these for their products (RING doorbells and Rekognition) and has utilised appropriate third parties to strengthen their policies in related areas, there remains a need for increased, especially publicly available, transparency on this topic. Despite this, Amazon’s coverage and reporting of risks falls short of our baseline expectations surrounding AI. In particular, we would welcome additional information on the internal education of AI and AI-related risks.”

M&G Total Return Credit Fund

The fund does not hold equities and therefore does not have the same voting rights as some other funds. However, M&G’s engagement activities are undertaken for all the companies that they hold and so they also engage with the companies whose bonds are held in this fund.

There were 13 engagements over the year in relation to this fund. The majority of engagements were made regarding climate change.

The Trustees have reviewed M&G’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.

1. CELANESE US HOLDINGS LLC

“Objective: The objective is to request that, Celanese, a chemicals company, sets a net zero target and that they disclose more granularity regarding their decarbonisation levers stated.

Action: M&G met with the company to make our expectations known.

Outcome: Celanese has set a target of a 30% reduction in scope 1 and 2 carbon emissions by 2030, and this data has been externally assured. The company is not yet ready to set a net-zero target as they want to establish a realistic path to achieving it. They have discussed this with the board, who agree that they need a full picture of emissions. Celanese is committed to understanding and quantifying their scope 3 emissions and has identified 7 out of 11 categories so far. Following their recent acquisition of Du Pont, the company is in the process of understanding their emission profile and scope 3 emissions. While they will not be able to report on scope 3 emissions in this year's report, they hope to report the full inventory next year.

Regarding SBTi verification, Celanese wants to wait for sector guidance to be finalised before committing to getting targets accredited. In terms of their decarbonisation strategy, the company is making continuous efficiency improvements, productivity gains, and engagement efforts to drive reductions without the use of capital. While electrification is not currently widely scalable or economically viable, Celanese is working with partners to understand their roadmaps and evaluating where it makes strategic sense to deploy renewable power. The company is also mindful of regulations, particularly in Belgium, and wants to be strategic in their approach.

We are pleased with the steps that Celanese is taking and will follow up in the new year to discuss progress on setting a net-zero target.”

2. STELLANTIS NV

“Objective: To convey our expectations on board gender diversity and to discuss how the company aims to meet said expectations. Discuss D&I initiatives and ambitions at the enterprise level.

Action: M&G had a call with company representatives from the investor relations department, including the Head of Investor Relations.

Outcome: The Dutch-incorporated global automobile manufacturer does not meet our expectations of board level gender diversity (currently 27%). There is however a plan to refresh the board at the conclusion of the current four-year board mandates, which will take place in 2025. Following the refreshment the board is expected to have 40% female representation. The company has targets in place at the senior level to have at least 30% female representation at the end of 2025, which they are on track to achieve. The rationale is retention and promotion and the driver to achieve the target is to cast a wider net, however industry-specific challenges are an obstacle.”

BNYM - engagement activities

The following commentary is based on the information that BNYM have provided in response to our questions and illustrates how they co-ordinate their voting and engagement activities with companies. Newton are a subsidiary of BNYM and are the entity that manage the Global Dynamic Bond Fund.

“We believe the value of our clients’ portfolios can be enhanced by the application of good stewardship. This is achieved by engagement with investee companies and through the considered exercise of voting rights. Our understanding of a company’s fundamental business enables us to assess the appropriate balance between the strict application of corporate governance policies and taking into account a company’s unique situation.

Our head of responsible investment (RI) is responsible for the decision-making process of the RI team when reviewing meeting resolutions for contentious issues. We do not maintain a strict proxy voting policy. Instead, we prefer to take into account a company's individual circumstances, our investment rationale and any engagement activities together with relevant governing laws, guidelines and best practices.

It is only in the event of a material potential conflict of interest between Newton, the investee company and/or a client that the recommendations of the voting service used (Institutional Shareholder Services, or the ISS) will take precedence. We employ a variety of research providers that aid us in the vote decision-making process, including proxy advisors such as ISS. We utilise ISS for the purpose of administering proxy voting, as well as its research reports on individual company meetings.”

BNYM Global Dynamic Bond Fund

The fund does not hold equities and given that bonds do not confer voting rights, there was no voting carried out in relation to this fund. However, BNYM does undertake engagement activities in respect of its bond holdings.

There were 4 engagements over the year in relation to this fund.

The Trustees have reviewed Newton’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.

KRAFT HEINZ CO

“We asked the company to quantify the climate and financial opportunity presented by protein diversification and to utilise this to inform target setting, supported by the board, to grow the share of nutritious plant-based and alternative proteins in its portfolio.

Key takeaways:

Kraft considers protein diversification a key opportunity for portfolio growth and contribution to their SBTI FLAG targets, with the company currently assessing the level of ambition they will set as part of their 2030 pathways. A spectrum of formulation options are under investigation to offer lower carbon alternatives, with Kraft especially building on successes at the ingredient level and in food service.
Kraft is exploring strategies to decarbonize their key commodities through climate risk modelling assessments, collective learning through coalitions like the Dairy Methane Action Alliance and product innovation.
The company conducts direct policy engagement on sustainable and resilient food systems and engages in markets outside of the US through trade association membership, which they are considering stronger public disclosure on.
The company revealed that KPIs linked to sustainability progress are included in relevant executive team members’ pay incentives and cascade throughout the organisation.
The company are not yet ready to make a commitment on just transition as they collect more industry data, but aim to reward innovative farmers and scale up good practices.
Kraft has a successful growth strategy targeting the cheaper end of the market, so sustainability and affordability are always parallel considerations in their plant-based product portfolio for broader consumer accessibility.
Taste is the main barrier to consumer uptake of plant-based products, but AI technology and an agile business model help optimize formulations for repeat purchase. Whilst taste is the leading marketing strategy, the company does include key nutritional information on pack for consumers looking for these functional benefits.
Many of the company’s plant-based products are nutritious, but they continue to improve in this area through innovation and reformulation, setting a commitment for 85% of all products to meet their Global Nutrition targets by 2025.

Insight - engagement activities

The following commentary is based on the information that Insight 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.

“As a leader in investment management, Insight understands that we must demonstrate the highest standards of accountability and transparency in our stewardship programme. We have an unwavering commitment to stewardship. We believe effective stewardship includes taking clients’ needs into account and working for the benefit of all stakeholders. Given Insight’s business focus on risk management, liability driven investment (LDI) and fixed income, for clients with very long-term investment horizons, our activity looks different when compared to the activity of many of our peers in the investment management industry, which focus largely on equities. We aim for transparency across all our activities, and collaborate with stakeholders where we believe we can maximise the impact of our engagement.

Engagement with issuers is a key part of our credit analysis and monitoring and complements our approach to responsible investment. As a matter of policy, our credit analysts regularly meet with issuers to discuss ESG related and non-ESG related issues. Given the size and depth of our credit analyst resource, one of the key inputs into our ESG analysis is the direct information which we receive from companies via engagements that take place. We also have a dedicated stewardship programme, which includes our prioritised ESG engagement themes. Our prioritised themes for this year are climate change, natural capital and labour management (human rights in the case of sovereign issuers). We use a research-led approach to identify poor performers to initiate targeted engagement to encourage positive improvements across each of these themes.

Our engagements are focused on creating positive change at the organisations we invest in. In determining the nature and objectives of an engagement relating to ESG factors, we adopt a Double Materiality Framework, whereby our approach is to categorise different themes to describe whether they have a greater impact in terms of their Financial Materiality or their Environmental & Social Materiality. Each potential engagement theme is prioritised by magnitude of importance to both enterprise financial value and societal stakeholders. Using a Double Materiality framework helps us to categorise the importance of different topics in their implications for an investments’ financial value (financial materiality) and for how that investment may impact the world at large (environmental and social materiality).”

Insight Enhanced Selection LDI Funds

These funds contain investments that provide exposure to long dated interest rates/inflation. They do not hold any equity investments and holds no voting rights. However, Insight does still engage with counterparty banks on relevant issues.

There were 30 engagements over the year in relation to these funds.

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

NATWEST GROUP PLC

"Their services include current accounts, credit cards, loans, overdrafts, mortgages, home and life insurance and investing for retail customers. They registered an increase in climate and sustainable funding and financing year-on-year from £24.5bn (2022) to £29.3bn (2023).

This engagement is aligned to SDG10 reduced inequalities and SDG13 climate action.

The issuer maintains a leading position in financing environmental impact but it has had a number of governance controversies, including the recent departure of its CEO and Chairman due to the de-banking scandal. The issuer’s continued investment to maintain its leadership position in climate strategy is contingent on the new CEO’s position on ESG, which remains unclear. Its focus on ESG was in part accelerated by its former CEO and saw strong targets being set, reporting of financed emissions for its material sectors and strong fossil fuel financing policies being introduced in its transition into a leaders in low carbon opportunities. It also provided an estimate of its facilitated emissions for the first time.

The issuer retains a dark green rating for its green bonds under our proprietary impact bond assessment framework due to strong ESG performance with well-defined use-of-proceeds categories that are likely to have a positive impact. There are plans to allocated 50% of the net proceeds to refinancing existing mortgages with the remaining 50% allocated to financing new mortgage products over the next 12 months.

Human rights is an increasing area of focus for the issuer as evidenced by its publishing of its salient human rights issues as part of its UN Guiding Principles Reporting responsibilities.

The issuer expects to improve on its score under the next Banktrack global human rights assessment in 2024 from their current 4.5/14 (“Follower” rating). Of 50 banks assessed, 28 are followers, 12 are front runners with scores between 7-9, with no leaders. The issuer has a special focus on modern slavery and has been accredited as a global living wage employer. During 2023, it developed a standalone Environmental, Social and Ethical (ESE) Human Rights Risk Acceptance Criteria (RAC) which applies requirements around human rights due diligence to additional sectors with heighted human rights risk not already covered by an ESE RAC. This includes a sustainability questionnaire, escalation process, considers supply chain, European regulation CSDDD and identification of best practice examples.

The issuer remains committed to SBTi and will re-submit their target and strategy in 2025. They remain engaged with SBTi despite uncertainty with sector guidance that is causing challenges for explaining their plans for achieving decarbonisation targets by 2030. Work continues on carbon pathway models. They are cognisant of Scope 3 finance emissions that are likely to increase for activities enabling the net zero transition. This is driving their purchase of carbon offsets and credits and training of frontline bankers and relationship managers via a partnership with Edinburgh University and sectoral deep dives. They also engage with politicians, civil service and other banks on the transition, offer green mortgages but recognise the limitations of current metrics (e.g., EPCs).

They have also appointed their first Head of Nature but is not ready to report against TNFD. Their Dutch subsidiary is leading the research on the LEAP approach and ENCORE tool.”

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.

“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.

year

“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

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.”

CT Regular Profile Unleveraged Gilt Funds and CT Credit-Linked Real Dynamic LDI Fund

These funds contain investments that provide exposure to long dated interest rates/inflation. They do not hold any equity investments and holds no voting rights. However, CT does still engage with counterparty banks on relevant issues.

There were 19 engagements over the year in relation to these funds.

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

1. BARCLAYS PLC: Engagement 1

“Barclay's latest annual report highlights continued progress on their efforts to enhance their approach to biodiversity risk management with a comprehensive update to their forestry and agricultural commodities statement, with significantly enhanced criteria for the sector regarding deforestation.

They have also started to pilot the TNFD framework and assessment for certain sectors, and have actively contributed to the TNFD consultation. We have previously discussed this topic with them through meetings, and followed up with them to share our biodiversity best practices and findings from engagement with other banks.

Rating: 2 stars”

2. BARCLAYS PLC: Engagement 2

“The company’s latest disclosure highlight good improvements on their approach to human rights due diligence. In 2023 they have conducted a human rights saliency assessment for their corporate and investment bank, highlight key human rights risks for this business, have used this to inform the February 2024 updates to their human rights statement, and have a developed a work programme for future areas to enhance their human rights approach.

This include plans to extend saliency assessment to all areas of the bank, exploring further approaches to provide access to remedy, and enhancing their human rights due diligence process. This remains an important topic to minimise human rights impacts of their activities. We have engaged with the bank on human rights, seeking for them to update their HR statement and enhance their due diligence.

Rating: 2 stars”

3. BARCLAYS PLC: Engagement 3

“The company provide significantly enhanced climate risk management in their latest climate updates. The company introduced additional financed emissions targets for agriculture, commercial real estate, and aviation. They also provided updates to their residential real estate target. The company became the first UK bank to publish a transition finance framework. They also updated their climate change statement introducing restrictions and tightened conditions for financing to the oil and gas sector.

This is significant as Barclays have lagged in this specific area and faced reputational risks as a result. We have engaged several times with Barclays on their climate risk management, including as a co-lead investor through the IIGCC bank working group.

Rating: 3 stars”