Fund Size: £301.00m

Total screened & themed / SRI assets: £28761.00

Total Responsible Ownership assets: £116188.00

Total assets under management: £268599.00

As at: 31/03/24

Contact: mark.ferguson@aegonam.com

Overview

Filters

Fund information

Policy

The fund’s investment approach seeks to identify the best bottom-up investment ideas available globally while focusing our exposure to companies that have strong sustainability characteristics, as defined by our detailed in-house sustainability analysis. In addition, there are a limited number of product-based exclusions, designed to prevent the fund from investing in companies that we believe have a materially harmful impact on environmental and/or social factors.

Step 1 – Product Exclusions

The fund applies a limited number of absolute exclusions as follows:

Adult entertainment

• Own an adult entertainment company or produce adult entertainment.

Animal welfare

• Engage in the production and sale of animal tested cosmetics.

Fossil fuels

•  Engage in the extraction of oil, gas or coal.

Gambling

• Derive more than 10% of revenue from gambling.

Genetic modification

• Conduct genetic modification for agricultural purposes.

Human rights

• Fail to address serious allegations of violations of international standards on human rights including the use of child, forced or bonded labor.

Nuclear power

• Own a nuclear power facility.

Tobacco

• Derive more than 10% of revenue from tobacco.

Weapons

• Produce or sell civilian firearms and firms which manufacture or sell armaments, nuclear weapons or associated strategic products.

This typically results in around 15% of the MSCI ACWI universe being excluded. Due to the structural sustainability challenges facing the above industries, we expect the market capitalizations of these areas to decline over the long-term relative to sustainable products and services.

Step 2 – Sustainability analysis

The sustainability analysis carried out by the RI team assesses three dimensions:

• Sustainable product: The nature of the products and services that a company provides (what a company does)
• Sustainable practices: Its operational practices and standards (how it does it)
• Sustainable improvement: Improvement over time (we track positive and negative sustainability changes).

We analyze every company on a stock-specific basis, looking at the absolute and relative nuances that apply to it in terms of product, practices, and improvement in the context of its region, sector, size and maturity and versus our own absolute standards. This analysis seeks to determine the key sustainability risks and opportunities for a company.

Our RI team refers to the Sustainable Accounting Standards Board’s (SASB) ‘Materiality Map’ as a starting point. Materiality is central to our process, as we strongly believe that sustainability analysis should be tailored to the specific context of an individual company, rather than using the same criteria for all. We believe the materiality map provides an effective way of highlighting the ESG factors that matter most to a company given the industry and the sector in which it operates, helping to focus our bottom-up sustainability research. Our experience is that this often leads to us focusing on different factors when compared to third-party ESG ratings and reaching contrasting conclusions.

The RI team’s sustainability analysis will gather and analyze qualitative and quantitative information on these material factors in the context of the ‘Three Dimensions’ framework discussed above to form a conclusion and a sustainability rating for a company. As a result of this analysis, companies are classified into three categories:

• Leaders: Companies that meet a large amount of our absolute sustainability criteria and are demonstrably leaders in their sub-sector.
• Improvers: Companies where sustainability issues have been identified but where the company is showing clear evidence of taking steps to improve its sustainability performance,
• Laggards: Companies that are either excluded due to a combination of poor product exposure (e.g., tobacco or defense manufacturers), poor sustainability disclosure and performance and/or with little evidence of a desire to improve.

Only companies designated as sustainability Leaders or Improvers are suitable for inclusion in the portfolio. The rationale for investing in both sustainability Leaders and Improvers is that empirical evidence shows that identifying and investing in sustainability improvers is one of the most effective ways of generating alpha by incorporating sustainability data into the investment process.

This process is dynamic. It does not stop once we decide to invest in a company. The sustainability analysis for every holding in the portfolio is updated at least annually, or more regularly if events occur that we think could impact the conclusions of the most recent research. During each update, the RI team can change the categorization of a company and should their analysis result in a downgrade to a Laggard, then the stock becomes uninvestible and must be sold from the portfolio as soon as is reasonably practicable. This independent oversight of the portfolio is important for the integrity of the process.

It is important to note that after applying the product exclusions and conducting sustainability analysis the resulting investment universe is still very large and provides ample investment opportunities to build a diversified portfolio of 35-45 stocks.

We recognize that within sustainability considerations, there are always debates, grey areas and nuances and this is a key reason why we analyze stocks from the bottom up.

In addition to the categorization of leader, improver or laggard outlined above, each stock is assigned to one of our seven sustainability pillars based on our view of the main sustainability issue they are trying to address. There is no set range for weightings to specific pillars – it is simply an outcome of bottom-up stock selection.

External ESG Screens - The truth is in the nuance

We do not believe in using third-party ESG ratings as a driver of our investment decisions, but rather as a flagging system for potential areas of concern that we must investigate and analyse from the bottom up. We believe that ESG ratings offer value in this context and help us to focus our research on areas where there might be concern. However, we often find that ESG ratings providers deliver conclusions that we fundamentally disagree with. This tends to be due to context and nuance of a particular company, and the generic methodology used.

We find that this tension is particularly apparent in small and mid-cap companies and in emerging markets, where companies may have very good products or practices, but are either not covered by the ESG rating agencies or screen poorly because they have not disclosed certain pieces of ESG information. In addition, ESG screens do not typically consider products or rates of improvement as part of their methodologies, which we feel misses much of the sustainability alpha that we are trying to capture. Many large companies have departments dedicated to ensuring that ESG disclosures are made, while smaller companies often suffer by simply not having the resources dedicated to showing how well they do things.

Process

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

At a very broad level, our investment process can be thought of as consisting of three key stages: idea generation, bottom-up analysis and portfolio construction. We have a very clear philosophical idea of the types of companies we are looking for which means the size of the universe we are realistically going to find ideas in is manageable.

Investment universe

As detailed in our ESG perspective, we apply some broad filters to derive an initial investment universe and then apply our sustainability exclusions. It is from this opportunity set that we search for the best sustainable growth ideas. We are guided by our philosophy in this search and use diverse sources of idea generation to ensure a consistent flow of stocks for consideration by the team.

Bottom-up analysis – Fundamental investment analysis combined with sustainability analysis

We emphasize stock selection and idea generation rather than blanket research coverage. We evaluate stocks using both our FVT analysis framework and in-depth sustainability analysis from our specialist RI team to reduce the universe to the specific types of opportunities which meet our investment criteria.

Investment Analysis

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

The key thing we look for across the FVT process are indications of underestimated change or persistency. FVT encompasses the three aspects of our detailed bottom-up analysis: fundamentals, valuation and technicals. While we dedicate the majority 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.

Sustainability analysis

This two-way interaction between the fund management team and RI team enables us to build a more holistic view of each company and discover attractive long-term growth opportunities by looking through an ESG lens. This is a radically different approach to our competitors. The final decision on a stock’s sustainability category rests solely with the RI team, who have the power to veto any investment idea.

Focus list

Ideas that we have carried out research on then comprise our focus list. Some of the stocks on this list will have been fully analyzed, having been through the full FVT and RI analysis process. They may be on the list but not in the portfolio at present because we like the fundamental story but think the valuation is too rich, or because we already have several stocks in a similar industry in the portfolio. In contrast, other stocks on the focus list may have only had high level initial research carried out on them. This may be because we think the company has potential but need to see further proof points of commercial success before we consider the idea fully, for example.

Portfolio construction

Our final stage is using the output of this analysis to construct an optimal portfolio of around 40 high-conviction stocks from the focus list. We seek to keep stock-specific risk high, meaning our ability as stock pickers is what drives our portfolio. Final decision-making responsibility for portfolio construction lies with the portfolio managers.

Research and ESG data

While our own research drives our investment process, we draw upon external research to help form our views. All portfolio managers have access to our primary information systems, Bloomberg, Reuters and FactSet, which provide us with real-time information on stocks, markets, indices, news, derivatives, economics, bonds, and currencies. We also have extensive access to the research departments of numerous major investment banks, stockbrokers, and independent sell-side houses.

To supplement our own research, we make use of a range of external sources of ESG data, including third-party ESG ratings, company and sector reports and regional reports. Although, as mentioned earlier, these are only used as inputs into the process and our conclusions are always based on detailed internally generated analysis.

The information stream generated from these sources is shared across the team on a timely basis. We attach more importance to meeting companies, as this provides valuable insights to company strategy and allows us to identify change factors that will drive the share price.

We will not take an investment decision or purchase a stock without completing our own investment and sustainability research.

Resources, Affiliations & Corporate Strategies

ESG resources

ESG research is conducted by our traditional research analysts as part of a comprehensive fundamental assessment.

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.

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.
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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.

Dialshifter

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

Aegon AM apply strict screening criteria to our ethical and sustainable range, avoiding companies and sectors which have a detrimental effect on the environment, such as:

• environmentally unsound activities – specifically PVC, Ozone Depleting Chemicals and hazardous pesticides.
• those convicted of serious pollution offences or breach internationally recognised conventions on biodiversity.
• energy intensive industries not tackling climate change and hazardous chemicals issues.
• coal mining/processing.
• oil and gas exploration/production.
• Excluding harmful companies with large carbon footprints delivers investments with lower carbon intensity and green energy transition themes.

Our approach results in a low carbon portfolio giving exposure to positive climate change solutions.

Our organisation is helping to support the Paris Climate Agreement and the Race to Net Zero by…

Aegon AM carries out a significant number of individual and collaborative engagements related to climate change to improve outcomes for our clients’ portfolios. As part of our engagement strategy, we challenge portfolio companies to set science-based greenhouse gas (GHG) reduction targets and expect them to work towards those with ambitious decarbonisation plans. We engage with companies on a regular basis, prioritizing top GHG emitters, and discuss progress towards their targets and the realisation of the 2015 Paris Agreement as the key international commitment to the climate transition.

Literature

• Fund overview & literature (including factsheet)
• Responsible Investing
• Literature

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 Investment Company (Ireland) plc (AAMICI plc) is an umbrella type open-ended investment company with variable capital, registered in the Republic of Ireland (Company No. 442106) at 25-28 North Wall Quay, International Financial Services Centre, Dublin 1. Board of Directors: M Kirby and B Wright (both Ireland), S Donald (UK). AAMICI plc is regulated by the Central Bank of Ireland. Aegon Asset Management UK plc is the investment manager and promoter for AAMICI plc.

Last amended: 06/08/24 08:28