January 2024

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AGS Airports Pension
SchemeJanuary 2024

Document classification: Public

Background and
Implementation
Statement
Background
The Department for Work and Pensions (‘DWP’) is increasing regulation to improvedisclosure of financially material risks. This regulatory change recognises
Environmental, Social and Governance (ESG) factors as financially material andschemes need to consider how these factors are managed as part of their fiduciary
duty. The regulatory changes require that schemes detail their policies in their
Statement of Investment Principles (SIP) and demonstrate adherence to thesepolicies in an implementation report.
Statement of Investment Principles (SIP)The SIP can be found online at the web address
https://www.agsairports.co.uk/media/1248/ags-airports-pension-schemestatement-of-investment-principles-november-2023.pdf
Changes to the SIP are detailed on the following pages.
Implementation Report
This Implementation Report is to provide evidence that the Scheme continues tofollow and act on the principles outlined in the SIP. This report details:•

actions the Trustee has taken to manage financially material risks andimplement the key policies in its SIP•

the current policy and approach with regards to ESG and the actions takenwith managers on managing ESG risks•

the extent to which the Trustee has followed policies on engagement,
covering engagement actions with its fund managers and in turn theengagement activity of the fund managers with the companies in which
they invest•

voting behaviour covering the reporting year up to 30 June 2023 for and on
behalf of the Scheme including the most significant votes cast by the
Scheme or on its behalf.

Summary of key actions undertaken over the Scheme reporting year

© Isio Group Limited/Isio Services Limited 2024. All rights reserved•

The ISC provided approval for Alcentra to extend the life of the EDL II fundby two years. This will allow the Fund additional time to exit positions which
had taken longer than anticipated to realise, as a result of the impact of
Covid-19.

•

Following an agreement from investors, the Aviva infrastructure fund waschanged to a ‘closed ended mandate’. This means that the fund will bewound down over a period of 5 years as opposed to continuing as an openended investment vehicle.

•

To ease liquidity strain as well as maintaining the ability to provide additional
collateral for the Scheme and to have the option of increasing the liability
hedge with Insight, the Trustee agreed to redeem their holdings in the M&G
Alpha Opportunities Fund and the remaining holdings in the LGIM

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Diversified Fund and the JP Morgan Unconstrained Bond Fund where theproceeds were held in the Trustee Bank Account.
•

The Trustee agreed to use the proceeds from the redemptions to increase
the hedge with Insight to 80% (on technical provisions).

•

As a result of significant changes to the strategy over Q4 2022 amid the UK
gilt market crisis, the Trustee conducted a strategy review in March 2023,
where Isio presented options for the evolution of the Scheme’s asset
allocation. Following the review, the Trustee agreed to retain the current
asset allocation and 80% liability hedge.

Implementation Statement
This report demonstrates that the AGS Airports Pension Scheme has adhered to its
investment principles and its policies for managing financially material
considerations including ESG factors and climate change.

SignedPosition
Date© Isio Group Limited/Isio Services Limited 2024. All rights reserved

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Managing risks and policy
actions DB

Risk / Policy

Definition

PolicyActions

Interest rates
and inflation

The risk of mismatch
between the value of the
Scheme assets and present
value of liabilities fromchanges in interest rates andinflation expectations.

To hedge 80% of these risks
on a Technical Provisions
basis.

Due to the UK gilt market
crisis in Q4 2022, Isio and theTrustee conducted astrategy review in March
2023, where it was agreed toretain the current asset
allocation and 80% liability
hedge.

The Trustee notes its desire
to implement a higher
hedging ratio if suitable froma liquidity and funding
perspective.

The Trustee reviewed the
SIP in November 2023 totake account of the changes
to the investment strategy
and regulatory updates.
Liquidity

Difficulties in raisingsufficient cash whenrequired without adversely
impacting the fair market
value of the investment.

To maintain a sufficient
allocation to liquid assets sothat there is a prudent buffer
to pay members benefits asthey fall due (includingtransfer values), and toprovide collateral to the LDI
mandate.

Over the Scheme year, theTrustee received multiple
updates from the investment
consultant on the liquidity
position of the Scheme.

The Trustee withdrew funds
from M&G Alpha
Opportunities Fund, LGIM
Diversified Fund and JP
Morgan Unconstrained Bond
Fund to ease liquidity strains
in order to achieve theirtarget liability hedge.

MarketExperiencing losses due tofactors that affect the overall
performance of the financial
markets.

To remain appropriately
diversified and hedge away
unrewarded risks, whereaffordable and practicable.

CreditDefault on payments due aspart of a financial security
contract.

1. To remain appropriately
diversified and hedge away
any unrewarded risks, wherepracticable.
2. To diversify this risk by
investing in a range of credit
markets across different
geographies and sectors.
3. To appoint investment
managers who actively
manage this risk by seeking
to invest only in debt

© Isio Group Limited/Isio Services Limited 2024. All rights reserved

Following strategy meetingsin 2023, the Trustee agreed
a formal policy for meetingany cashflow requirements.

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securities where the yield
available sufficiently
compensates the Scheme
for the risk of default.

Environmental, Exposure to Environmental,
Social andSocial and Governance
Governancefactors, including but notlimited to climate change,
which can impact theperformance of the
Scheme’s investments.

To appoint managers who
ESG actions undertaken:
satisfy the following criteria,• The Trustee has
unless there is a gooddeveloped a formal ESG
reason why the manager
beliefs policy todoes not satisfy each criteria:
document its approach
1. Responsible Investment
to ESG, and how ESG(‘RI’) Policy / Framework
factors are integrated
into investment
2. Implemented via
decisions.
Investment Process• The managers’ ESG
3. A track record of using
policies were reviewed
engagement and any voting
and presented to therights to manage ESG
Trustee in an Impact
factors
Assessment report in
4. ESG specific reporting
March 2023.
5. UN PRI Signatory
The Trustee monitor the
managers on an ongoingbasis.

Currency

The potential for adverse
currency movements to havean impact on the Scheme’s
investments.

1. The Scheme’s current
mandates hedge all thecurrency risk back to
Sterling.
2. Any active currency
positions taken by managers
i.e. DGF, DCF, are risk
managed and at thediscretion of the managers.

Non-financial

Any factor that is notexpected to have a financial
impact on the Scheme’s
investments. This includes
the extent to which theviews of Scheme members
and beneficiaries in relation
to ethical considerations,social and environmental
impact, or present and future
quality of life of the members© Isio Group Limited/Isio Services Limited 2024. All rights reserved

Non-financial matters are
not taken into account in theselection, retention or
realisation of investments.

Document classification: Public | 5and beneficiaries of the
Scheme in the selection,
retention and realisation of
investments.

Transition

The risk of paying
unnecessary costs or being
at increased risk of adverse
market movements whentransitioning assets from one
manager or asset class

Organise transitions in a
structured fashion with theadvice of advisors or byusing a specialist transition
manager if appropriate.

Out of market

The risk of asset pricefluctuations that negatively
impact the Scheme whilst
the Scheme’s assets are in
the Trustee Bank account.

Ensure ongoing monitoringof the Scheme’s assets andtransfers.

© Isio Group Limited/Isio Services Limited 2024. All rights reserved

The Trustee received advice
from their investment
consultants on all transition
activity carried out over theyear.

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Changes to the SIP

The SIP was not updated over the Scheme year (to 30 June 2023). The SIP was
however updated in November 2023 to take account of the changes to theinvestment strategy and regulatory updates. A copy of the revised SIP is available on
the Company website, or via the link earlier in this document.

© Isio Group Limited/Isio Services Limited 2024. All rights reserved

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Current ESG policy andapproach

ESG as a financially material risk
The SIP describes the Schemes policy with regards to ESG as a financially materialrisk. The Scheme has agreed a more detailed ESG approach, within the ESG Beliefs
Policy, which describes how it monitors and engages with the investment managers
regarding ESG polices. This page details the Trustee’s ESG beliefs. The following
pages detail our view of the managers, our actions for engagement and anevaluation of the engagement activity.

Risk
Management

i.
ii.
iii.

Approach /Frameworki.

ii.
Reporting &Monitoring

i.

ii.

iii.

Voting &Engagement

i.

ii.

Collaboration

i.

ii.

iii.

© Isio Group Limited/Isio Services Limited 2024. All rights reserved

ESG factors can be financially material and managing these risks forms
part of the Trustee’s fiduciary duty.
There should be a positive ESG tilt to the investment strategy in returnfor anticipated risk reductions.
Any impact on risk and return due to ESG integration should beconsidered alongside the Trustee’s risk budget and the Scheme’sfunding position to avoid any additional cost to the Scheme sponsor.
The Trustee will seek to understand how investment managers
integrate ESG considerations into their investment decisions andinclude reference to ESG capabilities in future evaluation criteria whenselecting new investment managers.
The Trustee will seek to align their ESG objectives with aninternationally recognised framework.
The Trustee will monitor each manager against their ESG KPIs on an
ongoing basis and will conduct a full review of the overall compliance ofthe portfolio against these on a regular basis.
ESG metrics (e.g. carbon reporting) will be developed and added toongoing reporting activity to determine the impact of the Trustee’s ESG
policies.
ESG factors are dynamic and continually evolving; therefore, theTrustee will receive training to maintain an understanding of thesefactors, including an annual ESG training meeting for all Trustee
members.
The Trustee will seek to understand each investment manager’s
approach to engaging with portfolio companies and the effectivenessof these activities.
The Trustee will maintain regular dialogue with the Scheme’s
investment managers, predominantly through their Advisor, tounderstand progress relative to peer group.
Asset managers should sign up and comply with common codes andpractices such as the UNPRI & the UK Stewardship Code and/or TCFD.
If they do not sign up, they should provide a valid reason why.
Asset managers should engage and collaborate with other market
participants to encourage best practice on various issues such asboard structure, remuneration, sustainability, risk management anddebtholder rights.
The Trustee has a strong desire to participate with Asset Managers tocollaborate where possible to maximise the ESG impact.

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ESG summary andengagement with theinvestment managers
Manager andFund
M&G Secured
Property Income
Fund

ESG Summary

Actions identified

M&G have an established
Responsible Property
Investment framework, whichgoverns ESG integration into
the Fund.

It was proposed by Isiothat M&G could identify
and take advantage of
ESG opportunities as partof the investment decision
making process.

Extensive ESG analysis iscarried out as part of theirdue diligence process and
SPIF has a strong history ofactive engagement andcollaboration on ESG related
topics.
M&G are focusing on
developing a net zero carbon
pathway model to monitor
assets’ climate emissions
within the Fund.
AlcentraDirect Lending(EDL II & III)

Alcentra have a Responsible
Investment Team who review
the output of the quantitative
ESG Scorecard and help to
integrate ESG into the Funds.
ESG metrics are incorporated
into Alcentra’s quarterly
reports and over the previous
12 months have introduced
dedicated ESG reports.
As the existing EDL funds are
fully invested, any future ESG
improvements are most likely
to be focused on enhanced
engagement andstewardship priorities.

Aviva

Aviva have clearly
demonstrated that ESG is
integrated into theinvestment philosophy of theInfrastructure Income Fund.
ESG is assessed prior to theacquisition of assets and also
throughout the lifetime of theinvestment.

© Isio Group Limited/Isio Services Limited 2024. All rights reserved

The Fund could also
include social andengagement reporting aspart of the Fund’s ESG
reporting cycle andimprove social initiatives
with tenants.

It was proposed by Isiothat Alcentra could set
fund-level ESG priorities
and introduce fund-level
ESG policies.
Alcentra could also
introduce
engagement/stewardshipobjectives and milestones
for portfolio companies
and provide fund-level
engagement data.
Alcentra should consider
adopting a firm-wide net
zero commitment andclimate policy.
Aviva should set Fundspecific and quantifiable
ESG, Climate and Social
objectives. The Fundshould also look to provide
engagement examples
and report on formal
metrics.
The Fund should consider
fund-level engagement

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priorities andimprovements inengagement activity
impact metrics. Quarterly
reports should detailrecent engagement
activities, emissions data
and ESG metrics.
In addition, Aviva could
introduce fund-levelclimate objectives andmetrics.
Insight LDI© Isio Group Limited/Isio Services Limited 2024. All rights reserved

Insight have a robust ESG
Insight should consider
scoring system for thedeveloping internalcounterparties they deal with. diversity targets, focused
not only on gender but
Insight have madealso on race. In addition,
improvements to their
Insight should consider
counterparty engagement
placing a greater
process with the aim ofemphasis on diversity &achieving a greater level ofinclusion when assessing
impact in their engagements companies/counterparties.
with counterparties.
Isio proposed that Insight.
consider ESG reporting for
LDI funds as well as
consider the inclusion ofan engagement summary
in regular reporting.
Insight could also consider
key performanceindicators (“KPIs”) andmilestones forengagements.

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Engagement

As the Scheme invests via fund managers the managers provided details on their
engagement actions including a summary of the engagements by category for the
12 months to 30 June 2023.
Fund name

M&G Secured
Property Income
Fund

Engagementsummary
Total engagements:
21
Environmental: 12
Social: 1
Environmental &Social: 8

Commentary

Due to the nature of most of the leases within
the Secured Property Income Fund, M&G statethat their overall influence as a landlord islimited. However, M&G maintain a dialogue withall occupiers, and as part of this, positive ESG
initiatives are encouraged. The fund iscommitted to becoming net-zero on carbon
emissions by 2050 and M&G are currently
developing initiatives to help meet this goal.
An example of a significant engagement
includes:Morrisons – Morrisons have committed to net
zero carbon emissions from own operations by
2035 and aim to reduce scope 3 emissions
across own supply chain by 30% by 2030. M&G
has engaged with Morrisons to discusstechnological opportunities including PV cells
alongside other initiatives and are currently
undertaking BiU assessments on site. Morrisonsalso shared their data for 2023 GRESB
submission and conduct semi-annual ESG
specific meetings with M&G.

AlcentraDirect Lending
EDL II and III

Total engagements:
145
Environmental: 20
Social: 23
Governance: 48
Other: 54

Alcentra engages with each of its borrowers on afull range of ESG topics and conducts an annual
ESG engagement questionnaire which allows
them to understand their borrowers’ approaches
to managing ESG risks (policies in place,
initiatives, etc.) and measure engagement
through qualitative and quantitative metrics.
Where possible, Alcentra uses their strong
relationships and position as lenders withmanagement teams and shareholders to ask
questions, make recommendations and share
their experiences around ESG in the private debt
market.
In addition, Alcentra continually evaluates theapplication of ESG incentive mechanisms withincredit documentation. On several transactions,
Alcentra closely engages with a borrower’s© Isio Group Limited/Isio Services Limited 2024. All rights reserved

Document classification: Public | 11

management team and owners, offering ESG
incentives, such as an interest rate reduction, if
certain ESG criteria are met, such as social
themes and employee satisfaction.
An example of a significant engagement
includes:Construction Conglomerate – Alcentra haveheld a board seat in the company since 2013,
and through their close relationship with the
management team have been permitted adegree of influence in decision making.
Throughout 2019-2021, Alcentra engaged at
Board level around health & safety discussing
practices and protocols resulting in health &safety being the first topic on the agenda forevery board meeting. Furthermore, Alcentra
engaged with the company’s head of ESG tosuggest the utilisation of an employee survey togain a greater insight into group culture andidentify areas of risk. Following theseengagements, health & safety risks are managed
more effectively, and the company have an
improved view of employees’ satisfaction.
Additionally, a significant fall in the number ofreportable accidents was seen, and thecompany conducted its first ever employee
survey indicating that additional training would
be beneficial.
Aviva
Infrastructure
Fund

Fund is now closed
ended in terms of
ICSWG so they do
not report
engagement figures

Aviva recognises its duty to act as responsible
stewards of its clients’ assets, and maintains astrong belief that Responsible Investment,
including environmental, social, and governancefactors, can have a material impact on
investment returns and client outcomes. Their
Responsible Investing approach is governed by
Aviva’s framework of policies, procedures,
governance structures and controls, with adedicated Real Assets ESG team, enabling
integration at Fund level. This includes theirbroader Responsible Investment strategy andapproach, which is developed and overseen by
the Global Responsible Investment team andthe ESG Governance Committee.
The fund is now closed ended in terms of
ICSWG so they no longer provide any form ofengagement examples or case studies. Aviva© Isio Group Limited/Isio Services Limited 2024. All rights reserved

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have however committed to achieving net zerocarbon emissions by 2050. Furthermore, Aviva
confirmed that they have developed an
improved carbon foot printing and climate risk
reporting offer to replace supplying data via theirquarterly investment report and ad hoc requests.
The reporting will cover a calendar year whereenergy, carbon and climate risk data is gatheredfrom suppliers and occupiers.
Insight LDI

Total engagements:
76
Environment, Social& Governance: 1
Social: 2
Governance: 73

Insight has engaged with a number of industry
participants on long-term strategic issues inrelation to LDI, including:- Green gilt issuance- Liaising with the FCA and TCFD in
relation to climate change reporting
disclosures- Working with derivative counterparty
banks on the integration of ESG factors
into the assessment of credit risk.
The team regularly engages with regulators,
governments and other industry participants toaddress long term structural issues, aiming tostay ahead of regulatory changes and adopt
best practice.
An Example of a significant engagement:
Pemex - Insight engaged with over 35% of theirfinanced emissions on climate-related issues in2022. They are also actively involved in a numberof collaborative initiatives on climate change. For
example, in 2022 Insight joined the IIGCC's Net
Zero Bondholder Stewardship Working Group
which is working to create guidance andstandards for bondholders engaging on climaterelated issues and continue to be involved in a
number of Climate Action 100+ investor groups.
In 2022, significant improvements in PEMEX’s
climate action governance and plans were seen,
after being influenced by Insight delivering aconsistent message on the long-term goals that
the CA100+ group has championed, combinedwith the shorter-term improvements that Insighthas encouraged directly with PEMEX.
Furthermore, in December 2022, PEMEX
announced plans to publish a 2023-2050
Sustainability Plan in 2023, which will include
the strategies, actions and metrics used to meet

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ESG goals. PEMEX made an important
improvement on governance by establishing asustainability committee to coordinate andoversee PEMEX’s ESG strategies and guidelines.

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www.isio.com

This report has been prepared for the sole benefit of the Trustee of the AGS
Airports Pension Scheme and based on their specific facts andcircumstances and pursuant to the terms of Isio Group Limited’s services
contract. It should not be relied upon by any other person. Any person whochooses to rely on this report does so at their own risk. To the fullest extent
permitted by law, Isio Group Limited accepts no responsibility or liability tothat party in connection with the Services.
Isio Services Limited is authorised and regulated by the
Financial Conduct Authority FRN 922376© Isio Group Limited/Isio Services Limited 2024. All rights reserved

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