Sustainable, Responsible &/or ESG 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