MINISTERS’ DEPUTIES

CM Documents

CM(2024)11

16 January 2024[1]

1490th meeting, 21 February 2024 11 Programme, Budget and Administration   11.1 Pension Reserve Fund of the Council of Europe Second report for 2023 of the Management Board to the Committee of Ministers Item to be considered by the GR-PBA at its meeting on 6 February 2024

 

PENSION RESERVE FUND OF THE COUNCIL OF EUROPE

SECOND REPORT FOR 2023 OF THE MANAGEMENT BOARD
TO THE COMMITTEE OF MINISTERS

Introduction

1.            In accordance with the Statute of the Pension Reserve Fund (PRF), the Management Board of the PRF reports to the Committee of Ministers at least twice annually. This note represents the Second Report for 2023 and summarises the work carried out by the Management Board since the last report, [CM(2023)120]. It presents the situation of the PRF at 30 September 2023.

I.          Market Background Q2 and Q3 2023

2.            Following a difficult 2022, the first half of 2023 was more favourable for diversified investment portfolios. Equities posted a strong return, with optimism that US inflation might be able to moderate significantly without an increase in unemployment rates. Positive sentiment around artificial intelligence has also driven remarkable performance for some of the world’s largest stocks. However, the landscape underwent a notable shift in the third quarter, marked by a simultaneous decline in both stocks and bonds, partly due to a sell-off in global bond markets. Investors’ focus has transitioned from the assessment of peak rates to the length of time central banks will have to hold rates at restrictive levels, with “higher for longer” increasingly viewed as the necessary scenario to mitigate persistent inflationary pressures. Fiscal sustainability was another area of concern for bond investors, with the US Treasury market in particular being hit by concerns over the amount of issuance that will be required to sustain a large fiscal deficit.

3.            In this context, the MSCI World index and MSCI EMU index posted returns of 5.83% (in EUR) and - 1.77%, respectively, over the period under review (31 March 2023 to 30 September 2023). The MSCI Emerging Markets index (in EUR) returned 0.51%. In fixed income markets, global government bonds (hedged in EUR) posted a return of -3.94% for the period under review, while the euro investment grade corporate bonds markets recorded a performance of 0.71%.

II.         PRF Investment Strategy

4.            On 13 July 2022, following the Funds’ Four-Year Review of 2021, the Committee of Ministers approved a new investment strategy, or strategic asset allocation (SAA). This SAA is as follows:

Table 1 - Recently Approved SAA

5.            The existing socially responsible investment (SRI) strategy (see below) for equity (including euro area listed real estate investments) and corporate bonds was maintained. No specific SRI criteria apply to global government bonds since the issuers are mainly members or observer countries of the Council of Europe. Investments in direct real estate, private equity and infrastructure may be placed in traditional (non-SRI) investment vehicles, as long as, when combined, they represent less than 15% of the PRF’s assets. Investments in emerging market sovereign bonds shall be made in SRI funds excluding controversial activities, integrating environmental, social and governance factors (in line with the PRF SRI criteria) in securities selection, and engaging with debt issuers to improve their social responsibility. Investments in non-compliant investment domiciles should not represent, when combined, more than 5% of the PRF’s assets.

6.            The SAA approved by the Committee of Ministers in July 2022 started being implemented in February 2023.

7.            The long-term expected net real return of this SAA was estimated at 3.4% (with an associated volatility of 10.6%).

III.        PRF assets at 30 September 2023

8.            Table 2 below depicts the assets of the PRF at 30 September 2023 compared to the previous report.

Table 2 – PRF Assets

9.            The treasury holds the monthly transfer of staff and member State contributions that serve to pay monthly pension benefits and administration costs.

IV.        Return of the PRF

10.         The return of the PRF is presented below in two manners, each analysing the performance from a different perspective: the time weighted return (TWR) or return on investment vehicles, and the internal rate of return (IRR) or actual annual return.

11.         The TWR is an industry standard used to measure asset managers’ results over a period of time. The TWR makes it possible to compare the PRF investment results and the Board’s mandate to invest according to the approved SAA represented by the benchmark. In doing so, the TWR does not take into account the impact of the timing of investing new contributions, as the timing of inflows is beyond the Board’s control. The TWR makes it possible to evaluate, and if needed, rectify the asset management if the external manager’s returns are below the benchmark returns. The TWR also makes it feasible to assess the impact on the investment results of any deviations from the SAA decided by the Board. Finally, from a long-term perspective, the TWR also measures if an investment strategy is meeting its expected return^[2].

12.         Since its inception in 2008, the PRF has received regular inflows, the timing of which have had an impact on the total return of the Fund. The IRR reflects the actual (or effective) return of the PRF, taking into account both the return earned by the asset managers appointed to implement the investment strategy and the effect of the actual timing of investing the incoming contributions.

13.         The difference between the TWR and IRR can be attributed to their differing calculation methodologies used to calculate between them and to the (timing of) investing new contributions each year.

Actual Annual Return

14.         Table 3 presents the PRF's actual annual return (measured by the internal rate of return or IRR) as of 30 September 2023, since the start of the PRF portfolio in February 2008, and since the change of target return of the Fund in January 2017.

Table 3 - PRF Actual Annual Return (IRR) at 30 September 2023

Source: Aon; European Central Bank for French Inflation Harmonised Index of Consumer Prices (HICP).

15.         The annualised return figures observe a significant decrease if they are calculated for shorter periods, due to the volatility of the investment returns, notably the significant market downturn witnessed in 2022. Incoming contributions in 2022 negatively weighed on the IRR figure, which is sensitive to both the amount and timing of contributions to the Fund.

16.         Pensions are long-term by nature; therefore the real return should also be observed for the long term as the objective of 3.40% real return is expected to be reached over the long term.

Figure 1: Expected Evolution of the Long-term Real Return

17.         Following the 2021 Four-Year Review, the real target return of the PRF was maintained at 3.4%. The Management Board is working to progressively implement the new SAA deemed to meet that target. The reported figures will adjust to this new SAA gradually as implementation progresses.

18.         The Management Board notes that the long-term performance of financial markets has positively contributed to the return of the PRF since inception in 2008 to date, despite the strong impact of the global financial crisis of 2007-2009; the euro area sovereign debt crisis of 2011; the drawdown of late 2018; the Covid-19 crisis; and the 2022 market downturn related to high inflation and the rising rates resulting from central banks actions.

Return on investment vehicles

19.         The nominal return on investment vehicles, (measured with the TWR) on both an annual and annualised basis, is presented in Table 4 below.

20.         Table 4 also details the evolution of investment vehicles and benchmarks since the Fund's inception date, and Table 5 on the following page focuses on the evolution since implementation of the previous strategy in 2019.

Table 4 - PRF Net Nominal Return (TWR) on Investment Vehicles since Inception of the Fund

Source: SGSS until end 2019; Aon thereafter.

Note (1): As defined in the updated PRF Investment Procedures: 30% MSCI World, 10% MSCI Emerging Markets, 20% MSCI EMU, 10% ICE BofA Merrill Lynch Global Government Bond (hedged in EUR), 5% Markit iBoxx Euro Corporates (bonds), 5% JPM EMBI Global Diversified, 5% of the 5% annual performance target for real estate and 5%, 6.5% annual performance target for infrastructure and 5% of the private equity fund’s TWR. As the Board decided that during the transition to the new SAA the new benchmark would gradually change alongside the execution of the shift, the current composition of the benchmark is: 30% MSCI World, 10% MSCI Emerging Markets, 20% MSCI EMU, 18% ICE BofA Merrill Lynch Global Government Bond (hedged in EUR), 7% Markit iBoxx Euro Corporates (bonds), 5% JPM EMBI Global Diversified (EUR-hedged), 5% of FTSE EPRA Nareit Eurozone Capped, and 5% of the 5% annual performance target for real estate.

Table 5 - PRF Net Nominal Return on Investment Vehicles
since 30 April 2019[3]

Source: SGSS (Société Générale Securities Services) until end 2019; Aon thereafter.

Note (1): As defined in the updated PRF Investment Procedures: 30% MSCI World, 10% MSCI Emerging Markets, 20% MSCI EMU, 10% ICE BofA Merrill Lynch Global Government Bond (hedged in EUR), 5% Markit iBoxx Euro Corporates (bonds), 5% JPM EMBI Global Diversified, 5% of the 5% annual performance target for real estate and 5%, 6.5% annual performance target for infrastructure and 5% of the private equity fund’s TWR. As the Board decided that during the transition to the new SAA the new benchmark would gradually change alongside the execution of the shift, the current composition of the benchmark is: 30% MSCI World, 10% MSCI Emerging Markets, 20% MSCI EMU, 18% ICE BofA Merrill Lynch Global Government Bond (hedged in EUR), 7% Markit iBoxx Euro Corporates (bonds), 5% JPM EMBI (EUR hedged), 5% of FTSE EPRA Nareit Eurozone Capped, and 5% of the 5% annual performance target for real estate.

21.         Table 4 above shows that the PRF nominal annualised return on investment vehicles was 0.46% above the benchmark index since the start of the PRF investments in 2008. The relatively good performances of the SRI equity managers, Allianz and Amundi; the global government bonds manager, J.P. Morgan; the listed real estate equity manager, Allianz then AXA; and the current direct real estate investments, contributed to the overall over-performance over the period. The slight underperformance (- 0.42%) in 2023 mainly stems from the negative performance of direct real estate, which is compared to an absolute return (positive) target benchmark - the latter being more meaningful over long investment periods.

V.         Engagement Overlay

22.         The purpose of the engagement overlay service is to engage with companies held in the portfolio with a view of promoting the adoption of better environmental, social and (corporate) governance (ESG) practices. It also uses the United Nations Sustainable Development Goals (“SDGs”) detailed underlying targets to frame company engagement objectives, when relevant, as well as articulating the positive societal and environmental impacts of engagement.

23.         The selected provider is Columbia Threadneedle Investments, a global asset management business of Ameriprise Financial, Inc.^[4]. Columbia Threadneedle Investments was a founding signatory of the principles for responsible investment (PRI), and responsible investing has since long been integral to their investment research and decisions.

24.         Columbia Threadneedle Investments engages in dialogue with companies from the investment universe by adopting one of the following three approaches:

-      a proactive manner, i.e. Columbia Threadneedle Investments contacts companies with perceived signs of weaknesses according to the ESG criteria, who are considered as priority companies.

-      a reactive manner, i.e. Columbia Threadneedle Investments contacts companies after incidents have occurred.

-      a thematic manner, i.e. Columbia Threadneedle Investments engages in dialogue on a sector or regional basis, targeting specific ESG themes.

25.         In addition, Columbia Threadneedle Investments also engages with policy makers and regulators where they seek to be a constructive investor voice, advocating for policies that raise the bar for the management of ESG risks faced by the companies in which its clients invest. Its activity is described in ANNEX II.

VI.        Evolution of the Fund

26.         Table 6 presents the evolution of the PRF from February 2008 until 30 September 2023:

Table 6 - Evolution of the Fund: February 2008 – 30 September 2023

Note (1): Total net long-term financial assets, (including real estate deposits in 2008 and 2009) plus cash held in portfolio. Investments at 30 September 2023 amount to EUR 564.63 million.

Note (2): Treasury at end of year includes the bank account dedicated to pensions held at the Société Générale Strasbourg. Treasury assets at 30 September 2023 amount to EUR 21.12 million.

Note (3): Net realised and unrealised gains/losses = net realised gains/losses on sales of investments + adjustment of the portfolio to market value at end of period + interest on deposits and late payments + net dividends + other Investment Income - net management fees. The net losses in 2008 come from the unrealised loss at 31 December 2008 generated by the adjustment to market value of the equity allocation. In 2011, net realised losses of EUR 6.56 million were recorded coming from the shift from mandates to mutual funds in the equity part, which absorbed the investment income of 2011 (EUR 3.41 million); and an unrealised loss of EUR 6.58 million was booked as the adjustment to market value of the Investment at 31 December 2011. In 2018, an unrealised loss of EUR 18.5 million resulted from the adjustment to fair value of the portfolio at quoted market price at 31 December 2018. At 31 December 2022, a net unrealised loss of MEUR 73.1 is explained by market performance to date and was partly offset by interests received and portfolio revenue. At 30 September 2023 a net realised gain was recorded following the selling of shares in line with the implementation of the new SAA. As a result of the market recovery, the global investment revenue as at 30 September 2023 is positive.

VII.       Activities of the Management Board

27.         Since the last report, the Management Board held two meetings, during which its members:

·                     monitored the Fund’s performance;

·                     took note of the unaudited Financial Statements at 30 June 2023;

·                     took note of the results of a survey on International Organisations Pensions Funds Governance co-ordinated by the Secretariat;

·                     took note of a holistic in-depth analysis of pension risk management;

·                     approved a new procedure on the proxy voting with private equity funds;

·                     approved the revised Investment Procedures following the selection of a benchmark for infrastructure investment;

·                     approved the revised draft Code of Conduct of the Council of Europe for the Management Board, as described in ANNEX III.

·                     discussed the various options for an “E” (environmental-focus) fund implementation;

·                     took note of the management costs for 2022;

·                     took note of a newly proposed format (“dashboard”) for performance reports;

·                     discussed the possibility of appointing an external climate-related portfolio data provider;

·                     approved the operating budget for 2024-2025;

·                     approved the Programme of Work for 2024.

VIII.      Recommendation

28.         In light of the preceding and in accordance with the provisions of the Resolution on the Statute of the Pension Reserve Fund, [Res(2006)1], the Management Board of the PRF invites the Committee of Ministers:

·                     to take note of the information presented in this document.

·                     to approve the election of Mr Pumffrey and Mr Uelfeti as interim Chair and interim Vice-Chair of the Management Board, respectively.

ANNEX I

PRF COMPOSITION AND RETURN

1.            Situation at 30 September 2023

1.       At 30 September 2023, the total assets of the PRF amounted to EUR 585.76 million. The composition was as follows:

Table 7 – PRF total assets at 30 September 2023

Source: Secretariat (based on SGSS data).

*Robeco’s fund was selected in 5 June 2023 and implemented in October 2023 (thus not yet incorporated in the table above).

Note (1): Positions in short-term investments are held to complement the monthly transfer of staff and member state contributions serving to pay pension benefit and administration costs during the year as per treasury management plan.

2.            Return of the PRF asset classes from February 2008 to 30 September 2023

2.      The figures provided hereafter for the nominal performance the different asset classes serve to compare the nominal returns obtained by the asset managers to their respective benchmarks. They do not give an indication of the effective nominal returns achieved by the PRF.

Table 8 - Nominal Return of PRF Short-term Investments

Source: Secretariat and Morningstar for data on the short-term money market funds’ average annual performance.

Note: The €STR (Euro Short-Term Rate) is the benchmark for interbank interest rates. It is calculated on the basis of interest rates obtained directly by the European Central Bank, and since 2 October 2019, it has gradually replaced the EONIA, which was discontinued on 3 January 2022. Since October 2019, only the €STR has been published, the EONIA being calculated from this new reference rate plus a fixed spread set at +8.5 bps over this period.

Table 9 - Nominal Return by Asset Class – Equity

Source: SGSS until end of 2019; Aon thereafter.

Note (1): As defined in the investment procedures: 50% MSCI World, 16.67% MSCI Emerging Markets and 33.33% MSCI EMU, the transition having been completed on this asset class.

Note (2): Since 6 February 2008. The Amundi strategy was invested through a mandate until 30 September 2011, and from then onwards, through a mutual fund.

Note (3): Since 15 June 2011. Annualised performance of the benchmark (MSCI EMU) over the period to 30 September 2023: 6.01%.

Note (4): At the end of each year, the benchmark valuation is carried out on the last working day of December, while the last annual valuation of the fund is performed on the preceding day. The resulting difference in performance is offset by the January performance of the subsequent year. If the performance of benchmark and fund would be calculated on the same day, the fund would replicate the performance of its benchmark in December and January.

Note (5): As for the Amundi fund, a regularisation of rebates of EUR +152 000 was received in January 2017 and allocated to the overall euro area equity portfolio, contributing approximatively +0.5% to the performance.

Note (6): The implementation of a full swing pricing mechanism for the Vanguard fund since October 2017 may result in a daily performance deviation between the fund and its benchmark, up to a maximum of approximately +/-60 bps. The swing pricing mechanism aims at protecting long-term investors when calculating the daily NAV by making an investor who is entering or exiting the fund pay for the costs that his/her transaction generates. Vanguard’s policy evolved towards a partial swing pricing mechanism as of 20 May 2019.

Note (7): Since 29 January 2016.

Note (8): Since 6 July 2023.

Note (9): Until 7 July 2023.

Table 10 - Nominal Return by Asset Class - Fixed Income

Source: SGSS until 2019 included; Aon thereafter.

Note (1): As defined in the Investment Procedures: 65.71% ICE BofA Merrill Lynch Global Government Bond (hedged in EUR) and 34.29% Markit iBoxx Euro Corporates All Maturities (Markit iBoxx Euro Corporates 3-5 years until 1 February 2016 and Markit iBoxx Euro Corporates All Maturities onwards). As the Board decided that during the transition to the new SAA, the new benchmark would gradually change alongside the execution of the shift; the current composition of the Benchmark is: 73.85% ICE BofA Merrill Lynch Global Government Bond (hedged in EUR) and 26.15% Markit iBoxx Euro Corporates All Maturities.

Note (2): Since 6 February 2008.

Note (3): Since 20 June 2012. Annualised performance of the benchmark over the period to 30 September 2023: 1.42%.

Note (4): Since 7 May 2019.

Note (5): Since 5 July 2023.

Table 11 - Nominal Return by Asset Class – Alternative Investments

Source: SGSS until 2019 included; Aon thereafter.

Note (1): Since 30 April 2019.

Source: Aon.

Note (1): Since 2 February 2023.

ANNEX II

Activity of Columbia Threadneedle Investments

1.             Engagement Overlay

1.            Columbia Threadneedle Investments prepares an annual priority list of companies to engage with, based upon the risk scoring of each company (as defined by their internal ESG-risk tool) and the most material financial holdings within their clients’ portfolios. During the year, other companies can be added to this list, if seen that reactive engagement is urgently needed. For each company on the list, Columbia Threadneedle Investments sets targeted outcomes of improved ESG practices that it wants to achieve with the company.

2.            The engagement actions undertaken by Columbia Threadneedle Investments cover most of the topics described in the SRI policy of the Council of Europe; the majority of them evoking conventions and international standards originating from the United Nations and the International Labour Organisation.

3.            Columbia Threadneedle Investments engages in dialogue with companies using different methods, including in-person meetings, conference calls, written correspondences and emails. These contacts can be engaged with at different levels within the company, for example at Board-level and C-level, with management and specialists within the organisation. Though Columbia Threadneedle Investments typically leads these one-on-one discussions face-to-face, they may also take part in group meetings or work with other stakeholders and investors, if this could lead to a better outcome.

4.            Engagement procedures with companies can have different time horizons. In Columbia Threadneedle Investments’ experience, an average period of two to three years is needed to either reach a positive outcome or to come to the conclusion that the engagement has failed.

5.            To monitor the process and measure its success, Columbia Threadneedle Investments sets milestones for every engagement started. A milestone is reached when a pre-defined change in behaviour is adopted by the company. At the same time, each action item consists of multiple intermediate milestones, in order to measure the progress made towards the final outcome.

Engagement Report Q1 2023

6.            Columbia Threadneedle Investments reported that during Q3 2023, they have carried out engagement activities with 125 companies from 27 countries, and they have achieved 19 milestones. Table 12, Table 13 and Table 14 below summarise this activity:

Table 12 - Columbia Threadneedle Investments Activity
Number of Companies Engaged by Region

Source: Columbia Threadneedle Investments

Table 13 - Columbia Threadneedle Investments Activity
Number of Companies Engaged by Issue

Source: Columbia Threadneedle Investments

*Companies may be engaged on more than one issue.

Table 14 - Columbia Threadneedle Investments Activity
Number of Milestones Achieved by Issue

Source: Columbia Threadneedle Investments

7.            Columbia Threadneedle Investments produces a quarterly report covering the priority companies, engagement case studies, engagement projects and milestones. The Management Board has decided to publish the priority list in this report. More detailed information on other areas of the engagement activity can be obtained upon demand.

Engagement Priority List

Table 15 – Columbia Threadneedle Investments’ Engagement Priority List

Themes engaged

Name

Sector

ESG Rating

Response to Engagement

Climate change

Environmental Stewardship

Human Rights

Labour Standards

Public Health

Corporate Governance

Business Conduct

Amazon.com Inc

Consumer Discretionary

ORANGE

Good

●

●

Bank Mandiri Persero Tbk PT

Financials

ORANGE

Adequate

●

●

●

CEZ AS

Utilities

YELLOW

Adequate

●

●

Fresenius SE & Co KGaA

Health Care

YELLOW

Good

●

●

●

●

Hannover Rueck SE

Financials

YELLOW

Adequate

●

●

●

Home Depot Inc/The

Consumer Discretionary

GREEN

Adequate

●

Invitation Homes Inc

Real Estate

ORANGE

Adequate

●

JPMorgan Chase & Co

Financials

YELLOW

Poor

●

Lowe's Cos Inc

Consumer Discretionary

YELLOW

Adequate

●

●

●

Minor International PCL

Consumer Discretionary

YELLOW

●

Moderna Inc

Health Care

ORANGE

Good

●

●

NTPC Ltd

Utilities

RED

●

PPL Corp

Utilities

ORANGE

●

●

●

Procter & Gamble Co/The

Consumer Staples

GREEN

Adequate

●

SITC International Holdings Co Ltd

Industrials

RED

Adequate

●

●

●

Volkswagen AG

Consumer Discretionary

RED

Adequate

●

●

●

●

ESG Risk Rating: Rating of a company's ESG risk exposure and risk management compared to industry peers. Source: MSCI ESG Research Inc.

Top quartile

GREEN

2nd quartile

YELLOW

3rd quartile

ORANGE

Bottom quartile

RED

Source: Columbia Threadneedle Investments

Engagement case studies examples

Company: Alibaba Group Holding Ltd

Country: China

Sector: Information Technology

Response to engagement: Good

Theme: Labour Standards

SDG:                  

Background: “Alibaba is one of the world’s largest retailers and e-commerce companies. It has a strong presence in China and is also increasing its international presence. Despite its growing global footprint, the company previously had a poor track record of investor engagement. However, it appears to be making more efforts to improve in this area, responding to our individual and collaborative engagement efforts.”

Action: “The company is undergoing a restructuring overhaul where the group will be split into six units, therefore ensuring and maintaining employee morale and integration will be key. We engaged with the company multiple times on the importance of attracting and retaining skilled talent in light of scrutiny over the “996” work culture, where employees’ work schedules span 9:00 am to 9:00 pm, 6 days per week. Previously, Alibaba’s CEO had endorsed the “996” work system, leading to international scrutiny of the company’s human capital management practices with controversies related to employee overwork and physical harm gaining media attention. Since then, Alibaba has made several improvements such as providing a psychological counselling hotline 24 hours a day to support employees. In recent dialogue, we asked about the company’s talent retention measures among the youth, given the countries’ youth unemployment hitting a 21.3% record high in June. In addition, the company’s turnover rate for under 35’s stands at 30%, appearing high vs. Tencent’s 23.6% turnover rate for under 30’s. In previous dialogues, we also discussed the importance of conducting employee engagement surveys to measure employee satisfaction, something that the company will consider after the restructuring process. Finally, we highlighted the importance of greater transparency regarding human capital metrics including detailed workforce composition, turnover, hiring, promotion rates by gender, ethnicity and geography”.

Verdict: “In Alibaba’s 2023 ESG report, we were pleased the company enhanced disclosure relating to its employee turnover rate following our engagement, disclosing the turnover rate by gender and by age. This information is helpful to get a better understanding of the trend of its workforce management measures and to identify potential risks and opportunities in its human capital management strategy. We continue to see this as an important topic as the company plans to scale its headcount as part of the restructuring plan and recruit 15,000 people in the next 6 months”.

Company: Volkswagen AG

Country: Germany

Sector: Consumer Discretionary

Response to engagement: Adequate

Theme: Human Rights

SDG:                  

Background: “VW is Germany’s largest automaker and has co-owned a plant in Urumqi, Xinjiang with SAIC through a joint venture since 2013. It has alleged exposure to Uyghur forced labour through this plant and its wider Chinese supply chain. The facility employs 39 Uyghurs. As such, VW is perceived to have a direct role in employing Uyghur minorities who may have been transferred from alleged state-sponsored oppressive schemes. VW does not believe they can close the Urumqi plant without the consent of SAIC, and without severely damaging their relationship with the Chinese authorities. However, many of their international investors will remain concerned about their involvement as long as this business relationship exists – potentially damaging their share price and increasing their cost of capital.”

Action: “Earlier this year, VW stated that a Board member had visited the Urumqi plant and found no suspicious activity. VW also committed to commission a reputable, independent third-party to conduct an audit. We had a call with VW's IR team to discuss these developments, explaining that an independent audit is unlikely to ease the concerns of international stakeholders, given the inability of third parties to gain unfettered access to workers in the region. We highlighted that our concerns are further exacerbated by China's recent counterintelligence law that criminalised due diligence and cracks down on international firms. Instead, we encouraged a formal review of the UN Guiding Principles for Business on Human Rights (UNGPs). Given the critical nature of their Xinjiang operations in terms of revenues, we believe that VW should undertake enhanced mitigation efforts. For example, the addition of a supervisory presence from VW Europe at the Urumqi plant may help provide some reassurance that there is no malpractice. This may also bolster VW’s grievance mechanism by providing workers with a means to communicate concerns directly to the company.”

Verdict: “In our view, it is unlikely that VW would be able to commission an independent audit of sufficient quality to ease investor and stakeholder concerns due to the high degree of state scrutiny and a lack of access to workers. The UNGPs set out a clear course of action in this situation – VW should publicly state the critical nature of its Urumqi business, implement a framework of enhanced mitigation, and be prepared to accept the potential financial and reputational damage that could result from continued presence in the region. VW should also seek to support, where possible, groups working on the ground to provide remedy to those affected. We will continue to engage with VW along these lines”.

8.            Following a Management Board request, the Secretariat contacted Columbia Threadneedle Investments to seek an indication of trend regarding areas of engagement. Columbia Threadneedle Investments made a customised extraction for the Council of Europe PRF and provided the table below.

Table 16 - Historical Milestones by Areas for the COE PRF

9.            The above table shows the milestones that Columbia Threadneedle Investments has achieved on Council of Europe PRF holdings over the period 2019-2022, to which they added the below comments:

“Human rights is one of seven priority E, S and G themes around which we structure our engagement programme. Human rights issues we engage on include freedom of expression, forced labour and modern slavery, data privacy and discriminatory use of technology, conflict risk and high-risk areas, and community and indigenous rights. These issues span a wide spectrum of sectors and often intersect with other priority ESG topics, including business conduct and ethics, labour standards, racial justice, and access to health and nutrition.

With the institutionalisation of climate reporting and net zero there are certain clear asks that we can make of a large number of companies on Environmental topics and more easily monitor progress, often relating to climate commitments and disclosures.

On the Social side it is important to have those conversations but can be less straightforward to identify tangible progress and success.

In addition, we are in a learning phase with some key S topics. For instance, in the first year of the human rights due diligence project there has been a lot of outreach on our side to understand the approach of different companies and to appreciate what constitutes best practice.

We have six dedicated analysts with Social thematic expertise involved in research and company engagement on the topic. We are committed to engage with companies on Social topics.”

10.         Columbia Threadneedle Investments also advised to remain cautious about the interpretation of these statistics because, on the one hand, they produce statistics with issues that have very different horizons, and on the other hand, the choice of engagement topics depends on the annual “surveys” carried out with their clients, (including the Council of Europe) as well as on topical news or prevailing context.

ANNEX III

Code of Conduct of the Management Board

of the Pension Reserve Fund

THE MANAGEMENT BOARD OF THE PENSION RESERVE FUND OF THE COUNCIL OF EUROPE (the Fund),

HAVING REGARD to Article 7, paragraph 1, of the Statute of the Fund,

CONSIDERING that the Management Board’s Code of Conduct dated 26 June 2006 shall be updated,

HAVE AGREED upon this Code of Conduct:

1.         Preamble

1.1       The members of the Management Board shall be jointly responsible for the management of the Pension Reserve Fund in accordance with its statute approved by the Ministers’ Deputies on 1 February 2006 (954^th meeting, Item 11.1) as amended.

1.2       The members of the Management Board shall observe the highest standard of ethical conduct. They are expected to act honestly, independently, impartially, and without regard to self-interest and to avoid any situation liable to give rise to a conflict of interests or appearance of conflict of interests. They shall be guided by the standards and principles reflected in the ethics framework of the Council of Europe as appropriate.[5]

2.         Independence and integrity

2.1       The members of the Management Board shall not seek or take instructions from any member state, authority or from any other body, including any decision-making body that they belong to, except the Committee of Ministers of the Council of Europe.

2.2       The members of the Management Board shall act independently from any interference from non-governmental organisations and/or commercial entities in the exercise of their functions and they shall neither seek nor accept any gratuity, benefit, or remuneration in connection with their functions.

2.3       The members of the Management Board shall report any fraud, corruption or misuse of the Fund’s assets to the Committee of Ministers.

3.         Professional secrecy

3.1       The members of the Management Board shall be subject to an obligation of strict confidentiality in performing their duties.

4.         Knowledge and skills

4.1       The members of the Management Board shall, with the support of the Fund Secretariat as well as the external advisors selected by the Management Board, possess and apply the knowledge and skills to fulfil governance responsibilities. They should act in order to constantly meet with the highest level of knowledge required for their mission.

5.         Conflict of interests

5.1       The members of the Management Board must put the interests of the Organisation as a whole ahead of their own personal interest or any sectoral interests they might have and must carry out their tasks in an independent and impartial manner. They shall avoid any situation liable to give rise to a conflict of interests or appearance of conflict of interests. A conflict of interests arises where a member of the Management Board has a personal interests which is such as to influence, or appear to influence, the impartial and objective performance of his/her duties. Personal interests of the members of the Management Board mean any potential advantage for themselves, their families, and their other acquaintances.

5.2       Any member of the Management Board that should consider him or herself to be in a situation liable to give rise to a conflict of interests or appearance of conflict of interests shall immediately inform the Management Board, which shall take the appropriate measures.

6.         Status of Council of Europe officials

6.1       Officials of the Council of Europe who have been appointed members of the Management Board will exercise such functions in an official capacity. In this respect, they will remain fully subjected to the Council of Europe Staff Regulations and Rules, as well as its ethics framework. They are covered by the relevant privileges and immunities.

7.         Application of the Code of Conduct

7.1       In case of doubt related to the interpretation of, and compliance with, the present code of conduct or the relevant provisions of the Organisation’s ethics framework, the Management Board may consult the Ethics Officer for advice. In case of any difficulties encountered in the application of the present code of conduct, the Management Board shall report to the Committee of Ministers which shall take the appropriate measures.

[dated and signed]