Sustainable, Responsible &/or ESG Policy:

The strategy is different from peers due to our client led ethical screening process which focuses on material ESG issues impacting the environment and society. We also seek to identify positive impact companies and currently invest in areas such as eco solutions and inclusive companies who seek to address inequality and are helping to solve demographic challenges.

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 are informed by our conversations with clients to understand their concerns and by 30+ years of experience managing ethical funds.

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.

Please refer to the screening policy on our website for more detail:

www.aegonam.com/globalassets/aam/documents/brochures/uk/esg-screening-policy.pdf

Ethical screening process

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.

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:

1. 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.
2. 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).
3. 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:

The strategy’s co-managers first look at the asset allocation in the strategy between equity, fixed income and cash. They discuss themes and views affecting the strategy’s asset allocation after which they review the portfolio positioning and determine the overall risk profile. Following this the asset class weighting for the strategy are set.

Insights are drawn from our global macro team, strategic policy group and our investment policy meetings.

We have a strategic framework that supports effective active asset allocation across a range of multi-asset strategies and can provide relevant insights for the asset allocation decisions in the Ethical Cautious Managed strategy.

Top-down process

The formal process takes place monthly to review both our long-term strategic views and to help identify tactical asset allocation opportunities in both equities and fixed income.

The starting point is the respective strategy meetings that take place within each of the underlying asset class platforms and provide the initial forum for idea generation from a top-down perspective.

For example, in equity meetings they consider and debate the economic backdrop, sector and style preferences and key themes driving equity markets.

In the fixed income meeting, we consider the economic outlook, expectations for inflation and interest rates and the impact on underlying bond markets to help shape our asset allocation thoughts across fixed income markets, our active interest rate/duration positioning and our top-down credit risk positioning.

Detailed strategy papers are prepared for each of these meetings, with particular focus on what has changed, what might change going forward and the catalyst for change as well as considering what has been priced into investment markets. In each case, our FVTS (Fundamentals, Valuations, Technicals, Sentiment’ quadrant analysis framework is used to assign ratings and recommendations around those top-down views.

One advantage in having a common research framework (‘FVTS’) across asset classes is to have all teams using a common language to frame their views, enable debate and challenge others to allow constructive feedback and potential cross-pollination of ideas where appropriate.

This outlines a solid foundation for top-down strategy and risk positioning, identification of risks and an asset allocation framework for the Ethical Cautious Managed portfolio managers to reference when setting the strategy and positioning for the Aegon Ethical Cautious Managed Fund.

Bottom-up process

Our proprietary 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 their respective teams – be that from the equity team, including those members who cover other geographical areas, or from the dedicated global credit research team.

We will not take an investment decision or purchase a new holding without completing our own investment research. We attach more importance to our own work and direct access to companies, as this will provide valuable insights to company strategies, outlooks, shortcomings and successes.

Company meetings and dialogue are 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 or sustainability of cash flows and correctly evaluating its impact gives the investor a strong advantage.

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

In credit, our credit research team utilise a proprietary analytical framework to evaluate the creditworthiness of issuers and the attractiveness of individual securities. These frameworks can include historical data and project expected financial results of existing and potential purchases.

For example, our credit analysts use a proprietary financial analysis framework that focuses on cash flow generation, debt levels, maturity schedules, liquidity, and consideration of future credit profiles. Based on this analysis, research analysts form their own independent view on an issuer’s fundamentals and other factors and periodically monitor the factors that influence these views to determine if revisions are warranted.

In addition, a strong relationship exists between our RI team and our portfolio managers, which enables material non-financial information to be incorporated into our investment processes. ESG research reports produced by our RI team sit alongside all the other existing investment research undertaken by our portfolio managers on a given security. The RI team also provide relevant news-flow and commentary on ESG issues to our portfolio managers that they might not receive from other sources.

ESG integration within fundamental research

Our portfolio managers consider ESG research alongside other relevant financial and non-financial factors in the investment decision-making process. The importance that the portfolio manager attaches to ESG issues is in proportion to their ability to influence security prices.

Considering ESG factors 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 (or lend to in the case of our credit investments) - that do not pass our rigorous security selection process - as well as those that do.

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 and credit analysts to form a judgement of ESG issues and leverage the RI team 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 or sector rather than taking a blanket approach. Company engagement is regularly shared with the RI team, 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 team 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.

External Research

While our own research drives our investment process, we draw upon external research to help form our views. All investment 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 from investment banks, which provide economic and company information, central banks, government agencies and multi-lateral agencies such as the IMF. We do encourage input from economists and strategists at investment banks.

Similarly, we cannot ignore credit rating agencies. We view commentaries provided by the rating agencies not as a source of information per se, rather as a market and probably a consensus view of a company. While the 2008 global financial crisis highlighted the unreliability of ratings, their findings on economies and companies can have a direct impact on market valuations. We have a healthy skepticism of rating agencies’ findings, but we will also be aware of the market impact of ratings changes.

To supplement our own research, we also 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.

We will not take an investment decision or purchase a holding without completing our own investment, ESG or sustainability research.

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 security 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 supported by our Portfolio Risk team which provides them with information and advice on risk analytics, portfolio construction, and stock and factor screens.

We do not take any active currency exposure. However, we do aim to build a diversified portfolio across the other areas mentioned. At a sector level, given the material impact of our exclusion criteria on the investible universe and portfolio, we carefully consider the industrial sector diversification of the portfolio across equities and corporate bonds relative to the peer group and representative market indices to ensure that we do not have one or two risks dominating the entire portfolio.

Our country positioning is largely a resultant of our bottom-up security selection however, again, we consider the overall aggregate exposures to ensure we are not taking on unconscious risks or any factors that may dominate or outweigh our bottom-up security selection.

From a market cap perspective, the fund can invest across the full market capitalisation spectrum with respect to equities. However, we believe that our fundamental research can uncover under researched ideas in the small to mid-cap area in particular. Therefore, we would expect to have a conscious relative bias to exposures within those areas, provided this was appropriate at the relevant point in the economic cycle.

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.

Dialshifter

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

Aegon AM apply strict screening criteria to our ethical 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.

SDR Labelling:

Unlabelled with sustainable characteristics

SDR Literature:

• Consumer Facing Disclosure link