This agreement aims to address the environmental, social, and governance (ESG) risks in the supply chain of companies that pension funds are investing in. Pension funds are responsible for promoting long-term stakeholder engagement and due diligence in outsourcing, reporting, and transparency.

The preamble of this agreement highlights the potential risks that arise from companies’ social and environmental negligence in the upstream supply chain. This kind of negligence – poor working conditions, environmental pollution, land expropriation, etc. – might affect the reputation and financial performance of companies. Having thousands of companies invested in different regions presents challenges and requires prioritisation.

This agreement is made between Participating Pension Funds, which already have existing responsible investment policies. OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights inform the Participating Pension Funds’ policies.

Participating Pension Funds commit to the OECD Guidelines and the UNGPs, while aligning their existing ESG policies with the same. To prevent and mitigate the adverse effect of their investments, they use social value creation and incorporate various ESG due diligence steps into outsourcing, monitoring, and reporting of external service providers.

As part of the outsourcing process, pension funds will deploy all efforts to:

• Implement ESG in policy and management systems and uses long-term value creation as a leading principle;
• Identify and prioritise the actual and potential adverse impact of activities undertaken in the Participating Pension Fund’s Asset Classes;
• Use and, where necessary and possible, increase leverage to ensure that the adverse impact is prevented or mitigated;
• Use and, where necessary and possible, increase leverage by imposing time-limited demands to encourage listed companies that cause or contribute to an adverse impact to provide access to remediation in accordance with Paragraph 8.2;
• Set up processes to provide access to remediation pursuant to Paragraph 8.3.

ESG policies must be compliant with the OECD Guidelines and the UNGPs. Participating Pension Funds will report on ESG policy results pursuant to the guidelines and principles. Reporting will also address specific ESG risk areas for each fund. Such reporting will be published, accompanied by summaries, subject to the ‘comply or explain’ principle.

A working group will develop the toolbox in the first year of the agreement’s entry into effect. Participating Pension Funds must be able to apply different tools that match their fund-specific leverage, size, and investment strategies. Each Participating Pension Fund will distribute this toolbox to its external service providers and so echo the Participating Pension Funds’ values and beliefs. The toolbox aims to support Participating Pension Funds in sourcing and commissioning external managers to integrate ESG considerations into their investment suggestions.

Participating Pension Funds must help provide access to remediation for individuals and communities affected by their investments. The objective is to simultaneously remedy the harm and improve existing processes to prevent future harm, allowing affected stakeholders to participate in drafting remediation plans.

The Participating Pension Funds must develop a clear policy framework to promote and support the integration of ESG factors into their investment decisions. Pension funds must take all possible steps to ensure compliance with the OECD Guidelines and the UNGPs.