As at: 28/12/22

Contact: mark.ferguson@aegonam.com

Overview

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Fund information

Policy

We apply a range of client-led exclusions at the start of our investment process, which excludes companies which undertake certain unethical activities from the strategies investment universe. The exclusions the strategy applies are informed by our engagement with clients to understand their concerns and the experience we have gained during more than 30 years of managing ethical strategies.

We aim for transparency in our screening process and publish the exclusion criteria we use. This means it is easy for clients to understand the types of companies we can and cannot invest in. Our underlying philosophy is to avoid companies that cause significant negative effects in society or the environment. We seek client feedback on the suitability of the criteria every two years to ensure they remain relevant to our clients and will adjust if necessary. Our experienced RI experts is responsible for the ethical screening undertaken for this fund and regularly reviews the portfolio for compliance with our policy.

Strategy Exclusions

We use both external screening databases and in-house research to ensure the companies in our ethical universe are suitable for investment and comply with the strategy’s screening criteria. Importantly, this is not a static concept, we constantly review the strategy’s holdings to ensure we are aware of any new developments in their business or new information that might change their eligibility. To demonstrate, a number of holdings have been sold from the portfolio over the past year after new information came to light, resulting in them no longer passing the screens. In each case, the RI experts engaged with the company to ensure their understanding of the new information was accurate/ Following careful consideration of the information, the portfolio manager was informed that the stock no longer passed the screen and had to be sold as soon as reasonably practicable.

The specific exclusions applied by the strategy are:

Animal welfare

• Provide animal testing services or manufacture or sell animal-tested cosmetics, household products or pharmaceuticals.
• Have any involvement in intensive farming.
• Operate abattoirs or slaughterhouse facilities.
• Are producers or retailers of meat, poultry, fish or dairy products or slaughterhouse by-products.

Military

• Manufacture armaments, nuclear weapons or associated products.

Nuclear power

• Provide critical services to, or own or operate, nuclear facilities

Environment

• Are involved in activities which are commonly held to be environmentally unsound – specifically manufacturers of PVC, ozone depleting chemicals and hazardous pesticides.
• Are in breach internationally recognised conventions on biodiversity and companies in energy intensive industries which are not tackling the issue of climate change.

Political donations

• Have made political donations of more than 1% or revenues in the past 12 months.

Genetic engineering

• Have patented genes

Gambling

• Have investments in betting shops, casinos or amusement arcades accounting for more than 10% of their total business.

Alcohol

• Derive more than 10% of their total business through involvement in brewing, distillation or sale of alcoholic drinks

Tobacco

• Derive more than 5% of their business from the growing, processing or sale of tobacco products.

Pornography

• Provide adult entertainment services

Banks

• Are corporate or international banks with exposure to large corporate or Third World debt.

Oppressive regimes

• Operations in countries with poor human rights records, and which have no established management policies on human rights issues.

Ethical Screening Process

• Our ethical screening analysis has three stages:

In order to screen based on these criteria, we use an independent ESG research platform, Vigeo-EIRIS Datalab. This process involves inputting our potential investible universe (FTSE All-Share index) from which we will eliminate most companies that we believe are inappropriate for our ethical vehicles, based on the criteria provided above. The excluded sectors are specified in the section above. Sectors that are excluded include pharmaceuticals, tobacco, oil & gas exploration, and food retailers.

Although our screening criteria are clear and explicit, certain ethical issues are not black or white. With over 30 years’ experience in managing ethical investments, we can consider these issues appropriately when they arise. Our pragmatic approach to screening means that we apply an additional in-house screen. This allows us to screen on issues not adequately captured by the Vigeo-EIRIS platform or that are particularly recent (e.g., mergers/acquisitions between an acceptable and unacceptable business will often result in the combined entity being unacceptable for investment).

Finally, we ensure that every stock left in the investible universe adheres to our underlying ethical philosophy, to avoid companies that cause significant negative effects in society or the environment. For example, a payday lender may pass the Vigeo-EIRIS screen, and our in-house screen based on its business conduct, however it does not fit into the ethos of our ethical investments.

Our experienced RI experts is responsible for the ethical screening undertaken for this strategy, freeing our portfolio managers to focus on security selection and portfolio construction. Once the ethical universe has been derived, the investment team conducts detailed bottom-up analysis on stocks considered for the portfolio. This analysis includes an assessment of ESG factors, using our common research framework.

Process

Our investment process provides an effective and disciplined approach to idea generation, analysis, decision making, portfolio construction and review. The process focuses on identifying profitable investment ideas and provides a forum for constructive engagement across the team.

Idea generation

Our standard investible universe is the FTSE All-Share Index which we monitor through quantitative screening. We may invest out-with this universe to include stocks in several Small Cap and AIM-listed names.

Our internal research generates most investment ideas, and we are agnostic to where an idea comes from. The portfolio manager will utilise expertise and knowledge from across the equity team, including those members who cover other geographical areas.

Our monthly global strategy Investment Policy meeting, and UK Strategy meeting provide a forum for idea generation from a top-down perspective in the UK equities market and considers the economic backdrop, sector and style preferences and themes.

Company meetings are also a fundamental part of our process to build a deep understanding of businesses. Therefore, we regularly engage directly with the companies we consider for investment. The information stream generated from these internal and external sources is shared dynamically within the team on a timely basis.

A key trigger to investment ideas is change, which can include the economic environment, management teams or a business model. Change can have a strong influence on stock prices and correctly evaluating its impact gives the investor a strong advantage.

Analysis
We use a common language and framework to analyse the most promising companies, Aegon AM’s Fundamentals, Valuations and Technicals (FVT).

To uncover the hidden value in equity markets we focus our research effort on less researched businesses. The key element we look for across the FVT process is indications of underestimated change or persistency.

FVT encompasses the three aspects of our detailed bottom-up analysis: fundamentals, valuation and technicals. While we dedicate most of our time to fundamental research, the exact proportion of each aspect of the analysis is fluid and varies on a case-by-case basis.

ESG integration within fundamental research

Considering ESG from an equity perspective is both about generating alpha and managing risk. All relevant factors, ESG or otherwise, that affect the sustainability of business models are considered in our investment process. The way our ESG process is represented in our portfolios is often by those companies we do not own - that do not pass our rigorous stock selection process - as well as those that do.

Environmental, social and governance issues are all explicitly considered in our fundamental research as we know that they each have the potential to materially impact both the financial performance and the valuation of our investee companies.

As fundamental investors, assessment of ESG issues has always been integral to our investment approach. When researching the investment case for a company it is the responsibility of our equity portfolio manager/analysts to form a judgement of ESG issues and leverage the RI experts for its expertise.

We assess ‘E’, ‘S’ and ‘G’ factors both from a risk and opportunity perspective and tailor this to the specific circumstances of a company rather than taking a blanket approach. Company engagement is regularly shared with the RI experts, and key ESG issues and questions are agreed and discussed on a per sector basis to reflect a more considered approach and nuances between companies.

Importantly, when evaluating ESG factors in the fundamental analysis process, our portfolio managers/analysts look across the ESG spectrum with support from our RI experts to ensure that ESG analysis is comprehensive and robust. Examples of areas we assess include: a company’s range of products and their implications for ESG outcomes, climate change policies and impact, tax transparency, carbon emissions, governance structure, management board structure and compensation, social policies, how a company is positioned for the transition to a greener economy and its resource efficiency.

To bring this together, we use a common three-stage ESG framework across the equity team to determine the materiality of the identified ESG factors from a risk and return perspective.

• Stage 1: Involves identifying the most important ESG factors for a given company.
• Stage 2: When evaluating a given ESG factor, we ultimately want to determine its level of significance relative to other considerations. What is the overall impact upon the investment proposition? Is it a headwind or a tailwind to business performance or valuation?
• Stage 3: Finally, we look at the direction of travel for a given ESG factor and a company’s overall ESG profile. Is exposure to these ESG risks or opportunities improving or not? We believe this consideration is critical as ESG, similar to other investment considerations, cannot be viewed in a static manner and as a firm, we value and support ESG improvement over time. Importantly, all information related to research, company meetings notes, and RI experts’ engagement activity is centrally stored to provide easy access to all team members, reflecting our one team culture.

Engagement with companies is a central part of our research in ESG. The RI expert’s engagement is well-suited to advancing broad themes such as diversity and inclusion which, in aggregate, are key to the functioning of the financial system. The fundamental equity analysts' focus is more specifically upon the strategy of the company to deliver sustainable long-term returns to shareholders. Our analysts will directly engage with management to better understand the risks, opportunities, and materiality of ESG factors, and how companies are adapting their strategies to manage those issues.

Decision making

Before a stock is purchased, the analysis is rigorously challenged and debated by all members of the team. All aspects of the investment thesis are considered, testing assumptions, and potentially bringing overlooked aspects to light. Key to reaching a conclusion on each stock is a judgement of the relative importance of each factor in the FVT framework and where we are in the economic cycle.
Quick decision-making capability in our stock selection process is facilitated by a daily team meeting, a standard stock discussion template and short lines of communication between team members and the dealing desk.

The stock selection process generates high conviction stock candidates for inclusion in portfolios. While a team-based approach is integral to our process to reach research conclusions, the individual portfolio managers are ultimately responsible and accountable for the decisions taken in relation to their strategies.

Portfolio construction

Portfolio managers are directly responsible for the strategies they manage. The portfolio construction process focuses on the performance target of a portfolio, while keeping it within its risk tolerance level.

If our analysis demonstrates the opportunity for a superior return from a stock idea, it becomes a conviction recommendation and is considered by the team for inclusion in the portfolio.
The portfolio managers consider a range of factors, including the level of conviction they have in an idea which considers the perceived risks and business risk.

Our risk system allows portfolio managers to test the risk impact of an idea before placing an order in the market, providing an in-depth view of the investment decision before fully committing. They are also supported by our Portfolio Risk team which provides them with information and advice on risk analytics, portfolio construction, and stock and factor screens.

Review (Buy/sell discipline)

We believe a focus on stock selection and investing with conviction in our best ideas will result in outperformance. A flexible and pragmatic approach, rather than adherence to a particular style, enables us to generate value throughout an economic cycle. We aim to exploit opportunities throughout the cycle, contingent on the prevailing circumstances. In our view markets are inefficient, especially in the small and mid-cap arena and this can be exploited through active investing with a repeatable process.

Our clear understanding of the stocks we own, derived from our in-depth analysis, allows us to respond dynamically to news flow and market changes and act accordingly. Stocks are regularly reviewed and re-evaluated. Triggers to review include:

• When the valuation has significantly re-rated or de-rated
• When earnings momentum has significantly improved or deteriorated
• When a stock has made a material impact (positive or negative) on the performance of the strategy in absolute or relative terms
• When the reason for owning a stock has changed
• When significant new information comes to light

Resources, Affiliations & Corporate Strategies

ESG resources

ESG research is conducted by our traditional research analysts as part of a comprehensive fundamental assessment. Credit research analysts are integrated with the investment team.

In addition, global responsible investment specialists support ESG integration by our research and investment teams, leading our active ownership activities, supporting the development of innovative products and promoting responsible investing best practices across the organization. This includes responsible investment professionals supporting fixed income that report to our Global Head of Credit Research and are integrated within our investment team.

Other responsible investment specialists serve as a central resource and are separate from the investment team. These RI professionals support engagement activities, policy implementation and other firm-wide responsible investing activities.

As of March 31, 2024, the responsible investment (RI) team consists of 21 professionals [1.]

Primary duties of the dedicated responsible investment professionals:

RI solutions and ESG integration

• Conduct sustainability research underpinning sustainability-themed, climate transition and impact solutions.
• Support development of new RI solutions.
• Support research analysts with ESG integration.
• Advise on industry best practices.
• Evaluate ESG training opportunities.
• Evaluate external ESG research.
• Exclusionary screening.

Engagement and voting

• Engage with issuers on behalf of most of our investment platforms.
• Encourage change in an effort to generate long-term economic value and reduce risk.
• Seek compliance with client ESG requirements and demands.
• Partner with other investors where appropriate.

Advisory and reporting

• Help develop, enhance and implement clients’ RI policies.
• Monitor ESG/RI policy and regulatory developments.
• Produce RI reports and advise on client ESG reporting.
• Coordinate and complete relevant external assessments of Aegon AM’s RI capabilities.

[1] Personnel may be employed by any of the Aegon AM affiliates.

Oversight

Framework and policy oversight

The Aegon AM Management Board (Aegon AM MB) oversees the implementation of the Aegon AM Responsible Investment Framework and associated policies. The Aegon AM MB is advised by an internal working group consisting of a broad representation of experts from investment, distribution and risk teams. This group, the Aegon AM Sustainability Board (AMSB) serves as an advisory body to the Aegon AM MB for best practices concerning the firm’s sustainability related activities and aspirations, including its responsible investment activities. The AMSB reports directly to the Aegon AM MB.

Within the wider Aegon Group, the AMSB acts as a local Sustainability Board and supports Aegon Group’s sustainability initiatives and programs. In addition, performance against the firm’s Responsible Investment Framework and policies is subject to regular policy attestation procedures, compliance reviews, internal audits and a semi-annual self-assessment procedure to create an internal KPI dashboard reported to both the Aegon AM MB and AMSB.

Responsible investment program oversight

Aegon AM’s dedicated responsible investment professionals act as a resource for all responsible investment matters. Using the RI Framework, experts maintain an overview of responsible investment activities. In addition to providing sustainability research and guiding the company on best practices, responsible investment professionals manage all engagement activities. With a focus on innovation and to balance expertise, most responsible investment professionals sit within the investment teams. In this way, they ensure appropriate information sharing and integration of ESG factors.

ESG integration oversight

Compliance and portfolio risk oversight
Routine monitoring and testing is conducted with respect to the firm’s responsible investment framework and its associated policies.

In terms of portfolio risk management, our risk analysts have access to internal and external ESG data in our portfolio management systems. This information can be used to assess the ESG risk profile of a portfolio. The team is exploring ways to implement ESG criteria into the routine risk reporting framework in the future. In addition, within the portfolio risk management team, the firm has a dedicated risk analyst who focuses on analyzing, assessing, monitoring, and reporting on ESG risks in our portfolios.

Related to guideline monitoring, Aegon AM’s portfolio risk control team utilizes the BlackRock’s Aladdin (Aladdin) trade compliance system as well as the Compliance Dashboard function, a workflow tool, to monitor trade restrictions. The firm deploys the Aladdin system in a manner that prevents trades from proceeding to settlement if a trade restriction is breached. Post-trade compliance is monitored by portfolio risk control on a daily basis.

Both portfolio risk management and portfolio risk control teams are independent of the investment management team.

Investment professionals’ alignment
Within Aegon AM, employees have performance and development objectives which are relevant to their role and contribution towards Aegon AM’s strategy, including an ESG objective relevant to their role. Individual objectives ensure that employees have a direct line-of-sight to how they contribute to Aegon AM’s strategy and sustainability goals.

Our remuneration program incorporates the firm’s global focus of integrating ESG factors into multiple components of our performance-linked compensation structure where applicable. At an organizational level, this focus is reflected by incorporating long-term sustainability of investment performance and client satisfaction measures as factors establishing the variable compensation pool.

Related to our Fixed Income, Equities and Multi-Asset & Solutions platforms, analysts and portfolio managers include responsible investing and ESG matters in their individual performance objectives. For roles where it is appropriate, this includes ensuring ESG matters are considered for each fund or portfolio based upon individual client mandates. Each individual’s performance result and rating are a key component in determining the value of their discretionary performance-based incentive award.

In addition, our executive leadership have individual objectives in respect of their involvement in Inclusion and Diversity initiatives and improving gender diversity within the organization.

Collaborations and Memberships

One or more Aegon AM affiliates endorse several international guidelines and business principles and actively subscribes to them when possible. Examples include:

• United Nations Principles for Responsible Investment (PRI). Aegon AM has been a signatory to the UN-supported PRI since February 2011. As a member, we commit to upholding the six principles for responsible investment and reporting annually on our progress. The PRI, an UN-supported network of investors, works to promote sustainable investment through the incorporation of environmental, social and governance issues into investment and ownership decisions.
• Net Zero Asset Managers Initiative. In November 2021, Aegon AM became a signatory to the Net Zero Asset Managers Initiative. As part of this initiative, we will continue to collaborate with clients on their decarbonization objectives and continue to engage with companies to encourage greenhouse gas measurement, targets and reduction.

Next to incorporating international guidelines and business principles into our investment processes in alignment with clients’ expectations, Aegon AM interacts with various collaborative investor initiatives. A full overview can be found in the Aegon AM Responsible Investment Report.

Aegon AM UK

• Climate Action 100+. In 2017, Aegon AM joined Climate Action 100+. Climate Action 100+ is an investor initiative aimed at ensuring the world’s largest greenhouse emitters take necessary action on climate change.
• Regional Corporate Governance Codes. Aegon AM complies with local corporate governance codes and best practices. For example, Aegon AM UK is a signatory to the UK Stewardship Code 2023. Aegon AM is also a member of Eumedion, an independent foundation whose objective it is to maintain and further develop good corporate governance in asset owners and asset managers established in the Netherlands.

Aegon AM also has extensive experience managing client mandates to adhere to specific international standards and policies. Examples of such standards include UN Global Compact principles, UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises. Further, through our active ownership activities, we engage with companies to encourage adoption of relevant standards and guidelines. Finally, we also comply with applicable local sustainable finance regulations such as the Sustainable Finance Disclosure Regulation (SFDR) in the EU.

Literature

• Fund overview (including factsheet)
• Responsible Investment
• ESG Screening Policy

For Professional Clients only and not to be distributed to or relied upon by retail clients.

Past performance does not predict future returns. Outcomes, including the payment of income, are not guaranteed.

Opinions expressed represent our understanding of the current and historical positions of the market and are not a recommendation or advice.

This document is accurate at the time of writing and is subject to change without notification.

All data is sourced to Aegon Asset Management (a trade name of Aegon Investment Management B.V.) unless otherwise stated. Data attributed to a third party ("3rd Party Data") is proprietary to that third party and/or other suppliers (the "Data Owner") and is used by Aegon Asset Management under licence. 3rd Party Data: (i) may not be copied or distributed; and (ii) is not warranted to be accurate, complete or timely. None of the Data Owner, Aegon Asset Management or any other person connected to, or from whom Aegon Asset Management sources, 3rd Party Data is liable for any losses or liabilities arising from use of 3rd Party Data.

Aegon Asset Management UK plc is the ACD of Aegon Asset Management UK ICVC, Aegon Asset Management UK Investment Portfolios ICVC and the AFM of Aegon Asset Management UK Unit Trust. UK Funds are registered for distribution in the UK only.

Last amended: 09/06/23 06:50