Aegon Global Short Dated Climate Transition Fund

Sustainable, Responsible &/or ESG Policy:

The fund invests in companies that have robust, credible plans to transition towards a low carbon economy and therefore are better aligned with investors’ net-zero goals.

To help select those companies, we utilise a proprietary climate transition framework to analyse and categorise each issuers readiness and alignment for net-zero

The Fund also utilises our ESG research framework to analyse and categorise broader ESG risks and their material effect on a company’s credit profile. We the ESG research framework to categorise issuers and screen out those with the most material ESG risks from our investible universe.

Active engagement also plays an important complementary role. Engagement is focused on the best interests of our clients and engaging with issuers in an effort to mitigate ESG risk, to help better understand the opportunities that companies face and encourage more sustainable practices.

More specifically on climate transition, engagement enables a greater understanding of a company’s climate transition risk, encouraging more aggressive climate related targets and helping to improve the quality of disclosures.

Process:

Climate Transition approach

Understanding the potential impacts and associated risks to company cash flows is key to retain the conservative nature of short-dated bond investments. Understanding and actively managing ESG risks, including climate related risks, therefore plays an important role in our investment decision making.

The first stage of our approach includes the measurement and assessment of a range of carbon emission metrics to consider the carbon footprint of our investments.

We then assess the financial impact of material ESG factors on an issuer’s credit fundamentals. For corporate bond portfolios, this is the role of our credit research team who utilise proprietary ESG analysis incorporating qualitative and quantitative elements to determine the potential materiality of the ESG issues and the economic impact they may have on the issuer’s ability and willingness to meet debt obligations. Details of our ESG integration approach are provided in a later section.

To assess the materiality of climate change risks for bonds, research typically focuses on the potential impacts of transition and physical risks – those arising from the economic or policy changes from the transition to a net-zero economy or from acute and chronic environmental changes, respectively.

The next stage is a dedicated look at transition readiness, assessing companies’ ambitions, performance, and alignment toward net-zero. This goes beyond backward-looking emissions to form a forward-looking view of a company’s transition readiness and alignment with the energy transition.

Proprietary Climate Transition Research

To perform the transition analysis our global responsible investment team have developed a proprietary climate transition research framework which focuses on the key elements required for transition to conclude and categorise an issuer’s readiness and net-zero alignment.

 1.Base Assessment

All issuers in the fund are subject to a base analysis where we consider the following:

• Net-zero ambition and associated targets
• Historical emissions and disclosure
• Climate / environmental governance and strategy

2.Sector Specific Adjustment

We then determine a company and sector’s ability to influence energy transition and categorise these into low and high influence sectors.

High influence sectors are those deemed to have a stronger ability to influence the achievement of global climate goals, and identified by a mix of emissions, ESG metrics and expert opinion. This influence can be direct as a result of their emissions or products, for example oil & gas or utilities; or indirect because of their ability to influence the activities of others, for example banks.

Issuers in high influence sectors are then subject to a further sector specific adjustment where analysis focuses on the key material climate issues for each sector, including scope 1 emissions, scope 3 emissions, products and/or supply chain. In these sectors, it is important to understand the idiosyncratic considerations and issues faced by companies and tailor our climate analysis accordingly.

Rather than simply exclude high influence sectors, our research is intended to identify and support those companies that have robust and credible plans to transition towards a low carbon economy. 

 3.Climate Transition Categorisation

Issuers are then categorised according to their level of alignment with progress towards a net-zero economy:

• Leader: Ready for a low carbon future and actively driving the net-zero transition
• Prepared: Policies, targets and actions aligned toward progress on net-zero
• Transitioning: Demonstrating awareness of transition but mixed degree of alignment
• Unprepared: Policies, targets and actions misaligned or unaware of required transition
• Laggard: Unprepared for a low carbon future and actively working against climate goals

Active engagement also plays an important complementary role to enable greater understanding of a company’s climate transition risk, encouraging more aggressive climate related targets and helping to improve the quality of disclosures.

 4.Implementation

Our climate transition analysis feeds through into climate related guidelines for the portfolio which have been set to reflect a reasonable pace of transition and encompass issuers from all sectors.

Such guidelines apply thresholds to the proportion of issuers in each climate category that we can hold in the portfolio. These guidelines move at five-year intervals to reflect the transition of the portfolio and pathway towards net zero. The proportion of issuers with poorer climate transition profiles is limited and diminishes over time. For example, by 2029 we are not permitted to hold issuers categorised as ‘laggards’ and by 2039 we can only hold issuers which are categorised as ‘Leaders’ or ‘Prepared’.

Guidelines have been designed to be compatible with emerging net-zero market frameworks such as those from the Paris Aligned Investment Initiative and the Net-Zero Asset Owner Alliance.

5.Engagement

We believe taking responsibility as an investor also means being a truly active owner, not just as a shareholder but as a financier more broadly. With a long-term focus, we have built a robust active ownership program that includes engaging with issuers in an effort to mitigate ESG risk, to help better understand the opportunities that companies face and encourage more sustainable practices.

Our dedicated global Responsible Investment team leads the firm’s active ownership program alongside our portfolio managers. In 2022, Aegon AM performed 832 engagement contacts with 397 issuers, up from 685 engagement contacts in 2021. For Aegon AM NL and Aegon AM UK, we also voted at 3,899 meetings globally, an increase from 2,963 in 2021. This increase of 32% is the result of a change in the implementation scope of the policy. In addition, we continue to utilize our milestone-based approach to better track and communicate our engagement activities and saw solid progress in our engagement dialogues, demonstrated in their progression to higher milestones.

Engagement can be initiated in different ways including:

• Norms-based screening – Where we look for companies to adhere to standards on behaviour relating to labour conditions, human rights anti-corruption and the environment such as the Global Compact Principles of the United Nations (UNGC), the United Nations Guiding Principles on Business and Human Rights and follow the OECD Guidelines for Multinational Enterprises.
• Our proprietary ESG assessment - We may decide to engage as part of our research process. This may be to obtain specific required disclosures, to better understand certain ESG risks or to target ESG performance improvement.
• Thematic topics - These include areas such as health and diversity. These engagements often target more than one company and are often best suited in collaboration with other investors and participate in collaborative external platforms.
• Fund or mandate specified policies - In some cases, our engagement priorities and activities will relate to specific responsible investing strategies that actively seek to encourage certain corporate ESG behaviour, such as climate transition.

Our strategy for the Aegon Global Short Dated Climate Transition Fund is to engage with a focused group of companies on net zero targets and progress towards decarbonisation. Our proprietary climate transition research and exposures will drive engagement prioritisation.

We seek to focus on:

• Issuers in high influence sectors
• Focus on issuers categorised as ‘Unprepared’ or ‘Laggards’
• Engagement dialogue will vary across companies and sectors
• Common objectives centre on target setting, target verification, robustness of strategic and decarbonisation strategy.

We have multiple ways in which we can conduct engagement:

• Bilateral engagement, leveraging Aegon AM’s global responsible investment team
• Collaborate with industry groups to encourage the largest emitters to take action (Climate Action 100+, CDP etc.)
• Active involvement in industry bodies seeking to influence climate change (e.g., IIGCC)

The dialogue and results of our engagement can have research and portfolio considerations such as:

• Insights and outcomes from engagement could prompt transition category upgrade or downgrade
• Where we see no prospect for improvement – holding review will be prompted
• ortfolio action taken in line with fund’s short-dated remit and climate guidelines

Best in Class ESG approach

ESG analysis is integrated into our credit research process alongside traditional financial metrics to assess an issuer’s credit profile. This is the role of our credit research team.

Our proprietary ESG analysis incorporates qualitative and quantitative elements to determine and assess the potential materiality of the ESG issues and the impact on an issuer’s credit fundamentals.

Materiality of ESG factors is ultimately defined according to the investment manager’s proprietary ESG framework based on 1-5 categories as follows:

• Leader: the fundamentals are positively affected by effective ESG practices
• Minimal risk: Fundamentally low exposure to ESG risks or presence of factors that mitigate most of the ESG risks
• Event risk: ESG risk exposures could negatively affect the issuer fundamentals, but the effect is not measurable, and timing is uncertain
• Fundamental risk: ESG risks are resulting in pressure on the issuer fundamentals, however we expect limited impact on the credit rating
• Rating risks: ESG factors have resulted in a material effect on the issuer fundamentals, that may or may not be currently reflected in its credit rating

We construct the Aegon Short Dated Climate Transition Fund in accordance with the following ESG guidelines:

• ≥ 90% of fund will carry an ESG category of 1,2 or 3
• Up to 10% of fund can be invested in issuers with ESG category 4
• We would not invest in an issuer with an ESG category of 5
• Unlimited exposure to ESG labelled bonds (Green, social, sustainability bonds)

Portfolio Construction

The portfolio managers draw upon the dedicated credit, ESG and climate analysis of the respective research teams to construct a global portfolio of c100 holdings with the dual purpose of aiming to deliver a financial objective of cash +1.25% gross of fees over rolling three year period whilst focusing its investments on companies transitioning to a net-zero economy. 

The portfolio is constructed to meet its climate transition and best-in-class ESG guidelines as described above.

Dialshifter

This fund is helping to ‘shift the dial from brown to green’ by…

The Aegon Global Short Dated Climate Transition Fund is a simple, liquid, and transparent short-dated bond strategy. It can help to ‘shift the dial’ through its integration of dedicated and proprietary climate transition research to help direct investments to companies that have robust, credible plans to transition towards a low carbon economy and therefore are better aligned with investors’ net-zero goals.

In addition, the fund seeks to reduce its carbon footprint and aims to have ?30% lower weighted average carbon intensity versus the broader universe.

SDR Labelling:

Not eligible to use label (out of scope)