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AEGON Asset Management

PRI reporting framework 2020

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You are in Direct - Listed Equity Incorporation » ESG incorporation in actively managed listed equities » Implementation processes

Implementation processes

LEI 01. Percentage of each incorporation strategy

01.1. Indicate which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities; and the breakdown of your actively managed listed equities by strategy or combination of strategies.

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
90 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
10 %
Total actively managed listed equities 110%

01.2. Describe your organisation’s approach to ESG incorporation and the reasons for choosing the particular strategy/strategies.

ESG Integration:

As active equity investors we believe that integrating a company's ESG performance within our fundamental analysis is a tool for both value creation and risk management; there is powerful evidence that companies with sustainable business models deliver superior long-term financial returns. ESG integration is undertaken for all the active equity assets that we manage.

Our active equity strategy is to create and manage concentrated portfolios where stock selection is the key driver of performance. The rigour and depth of our fundamental research is central to a comprehensive assessment of the risks and opportunities at a company level. The careful scrutiny of ESG factors is an important element of this and features in the investment process for each and every equity strategy we manage. We believe in a practical approach to integrating ESG factors, focusing on material ESG issues which have clear linkages to key business drivers and see the main benefits of incorporating ESG factors as follows:

- Deepens our understanding of companies and the environments in which they operate, helping us to quantify risks and opportunities

- Strengthens our conviction in our investment theses, thus supporting the management of concentrated, high-conviction portfolios

- Promotes a long-term focus, as evidence shows that companies which rank well from a sustainability perspective are more likely to outperform as investments over the long term

We are investing in management teams as well as businesses they run on shareholders behalf. Company meetings and regular engagement with boards and management teams are at the core of our approach to equity research. We use our influence with portfolio companies by highlighting ESG performance gaps and ways to improve. It is our belief that companies with positive ESG momentum will be rewarded by the market over time.

Central to the incorporation of ESG factors in our investment process is our independent Responsible Investment (RI) team, which is responsible for monitoring and assessing the ESG approaches, performance of and engagement with investee companies. The team monitors material environmental, social and governance issues associated with the industries and companies we research and communicates material factors, positive or negative, to the investment team as well as providing regular training on ESG across the business. The RI team's strong relationships with our investment team enables material non-financial information to be incorporated into our investment analysis and decision-making.

ESG integration in active equities spans the breadth of the investment process; from identifying trends analysing securities and portfolio construction to engaging with the companies that we invest in, voting and reporting to clients.

Screening & Integration:

In addition to the incorporation of ESG factors in the investment process for all of our equity strategies, we also have a long history of running dedicated responsible investing strategies. Our first such strategy, the Ethical Equity Fund (UK equities), was launched 30 years ago and applies a broad range of client led exclusions at the start of the process, followed by a fundamental research process which emphasises the importance of good governance and engagement with investee companies. Our Ethical Cautious Managed Fund (UK equities and sterling denominated corporate debt) also follows this broad outline. The ethical screens that are applied are reviewed every two years in a consultation exercise with investors

The Global Sustainable Equity fund also incorporates an exclusionary screen at the outset of the process. This is then augmented by in-depth sustainability analysis of each and every potential investment, with a view to constructing a portfolio of innovative and disruptive companies that are addressing the sustainability challenges faced by society. Our analysis looks at a company's products, processes and record of sustainability improvement and categorises it as a leader, improver or laggard. Only leaders and improvers are eligible for inclusion in the portfolio and we focus on improvers, as we believe this is a powerful way to benefit from companies which are affecting positive change. Furthermore, academic evidence supports the premise of investing in sustainability improvers as one of the most powerful ways of generating alpha from sustainable investing and suggests that improvers typically offer greater outperformance than leaders. Our sustainability analysis is updated periodically, and companies can be upgraded or downgraded based on their progress on the sustainability KPIs we track.

Thematic:

Although we do not run any 'thematic' equity funds, at times, portfolio managers may incorporate thematic strategies in overall portfolio construction. Often these themes are ESG related, for example increased energy efficiency from OLED screens or lower CO2 emissions from electric vehicles.

01.3. If assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]


LEI 02. Type of ESG information used in investment decision

02.1. Indicate what ESG information you use in your ESG incorporation strategies and who provides this information.

Type of ESG information

Indicate who provides this information  

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

02.2. Indicate whether you incentivise brokers to provide ESG research.

02.3. Describe how you incentivise brokers.

The RI team contributes their views on the quality of ESG research into the broker review process.

02.4. Additional information. [Optional]

For both ESG integration and screening we use the following sources of information:

· Primary data from companies. This covers quantitative data that they report and also qualitative information provided during company meetings and primary research. As a matter of course, we ask a number of specific material ESG questions in meetings with company management.

· Secondary data from ESG research providers and brokers including industry and company reports, ratings and issue reports.

· Other sources of data for industry context such as CDP, WRI/Earthtrends, UK Environment Agency, International Association of Oil & Gas Producers, industry journals, broker research, news articles etc.

 


LEI 03. Information from engagement and/or voting used in investment decision-making

03.1. Indicate whether your organisation has a process through which information derived from ESG engagement and/or (proxy) voting activities is made available for use in investment decision-making.

03.2. Additional information. [Optional]

- Fundamental research templates used by equity analysts and fund managers incorporate ESG commentary, 3rd party ESG ratings and details of proxy voting

- Our investment teams also have ESG tearsheets which have been collaboratively developed by the RI and investment teams - these sheets outline the most material ESG issues that we believe companies face and key ESG questions for company meetings

- Engagement - If they are not directly involved (rarely), fund managers are consulted on their views ahead of ESG engagement

- Proxy voting - In the event that we are considering voting against or abstaining its proxies at a company meeting, our investment managers are required to contribute their views ahead of our votes being cast

- All meetings with companies (including those on ESG) are formally recorded 

- All sustainability research is stored in one location

- Our voting and engagement policy is publicly available through our website.

- We also report quarterly on our proxy voting activities, providing details of instances where we have voted against management and the rationale for this. This report is publically available on our website.


(A) Implementation: Screening

LEI 04. Types of screening applied

04.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

Ethical equity/Ethical cautious managed funds:

The Ethical Equity and Ethical Cautious Managed Funds are known to apply some of the broadest and strictest client led exclusions in the UK market. The funds apply client led exclusions relating to: alcohol, gambling, tobacco, adult entertainment, animal welfare, the environment (including excluding fossil fuels), genetic modification, military, nuclear power, human rights, political donations, banks.

Global sustainable equity fund:

The Global Sustainable Equity Fund applies a similar exclusionary screen to our ethical funds at the start of the investment process but due to the significantly larger initial investment universe and the composition of that universe, this results in a smaller proportion of companies being screened out. However, in addition to the exclusions that the fund applies, we also undertake detailed sustainability analysis that reduces the investable universe further. The Global Sustainable Equity Fund applies absolute exclusions relating to: gambling, tobacco, adult entertainment, animal welfare, fossil fuels, genetic modification, military, nuclear power, human rights.

04.2. Describe how you notify clients and/or beneficiaries when changes are made to your screening criteria.

Our clients and key intermediaries were involved in determining the screening criteria for our Ethical funds when they were first established. Similarly, client consultation was sought when establishing the criteria for our Global Sustainable Equity Fund, which was launched in 2016.

The ethical fund criteria have seen relatively little change since being established but are reviewed every two years and, again, our clients are always at the centre of the process for any adjustments. This is very much a two way process and in 2018 we conducted a client survey to gauage opinions on screening and ESG investments. In 2019, following feedback from clients, we explicitly excluded oil and gas exploration and production companies from the ethical funds.

The significance of any change to the screening criteria would determine how clients in the funds would be informed. Meaningful changes would require shareholder/investor approval via an EGM. Less significant changes would not require approval, but we would expect to consult investors ahead of making any changes. Any confirmed changes would be communicated via a formal process.

Our most up to date criteria are publically available on our website.


LEI 05. Processes to ensure screening is based on robust analysis

05.1. Indicate which processes your organisation uses to ensure ESG screening is based on robust analysis.

05.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your ESG screening strategy.

05.3. Indicate how frequently third party ESG ratings are updated for screening purposes.

05.4. Indicate how frequently you review internal research that builds your ESG screens.

05.5. Additional information. [Optional]

External ESG ratings provide a useful starting point for our ESG integration efforts and screening processes but we firmly believe that they have limitations both in the breath of their coverage and the way they analyse companies. Therefore, we augment this input with our own internal research in order to capture the nuances that external screens miss.

The ESG Research team track company news and commentary and also engage with company management directly. ESG 'incidents' are identified in this manner and may feed into our analysis. Otherwise, company ESG research that we have undertaken in-house, is typically reviewed annually, since companies typically report ESG data on that basis.


LEI 06. Processes to ensure fund criteria are not breached

06.1. Indicate which processes your organisation uses to ensure fund criteria are not breached.

06.2. If breaches of fund screening criteria are identified, describe the process followed to correct those breaches.

We have implemented what we believe to be a robust set of internal controls to prevent breaches in the first place. These controls are tested periodically and improved if they are found to contain weaknesses.

A formal breach would be recorded by the Regulatory and Operational Risk team (R&OR). Processes would be reviewed and amended to ensure a similar breach would be prevented in the future. Holdings in breach would then be sold on a best endeavours basis - typically this would be within one month.

06.3. Additional information. [Optional]


(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the proportion of actively managed listed equity portfolios where E, S and G factors are systematically researched as part of your investment analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]

We believe in a practical approach to integrating ESG into investment research and we focus on material ESG issues, with clear linkages to key business drivers.

Corporate governance - is systematically researched for all the companies that we invest in. Our RI team work with our equity portfolio managers to understand the corporate governance policies, frameworks and performance of our equity investments and in formulating strategies for voting and engagement. Alongside our internal corporate governance research, we also use corporate governance ratingss from third parties in quantitative strategies employed for global equities.

Environment & social- our consideration of environmental and social issues varies by sector, asset class and investment timeframe but they are integrated to varying extents in each analysis. Our focus is on understanding those environmental and social issues which have the most potential to influence the value of our clients investments. The RI team work closely with our equity portfolio managers to raise awareness, contextualise and quantify environmental and social factors as they pertain to their sectors. This includes the development of ESG tearsheets that outline the most material ESG issues that we believe companies face and the key ESG related questions we should be asking them.


LEI 09. Processes to ensure integration is based on robust analysis

09.1. Indicate which processes your organisation uses to ensure ESG integration is based on robust analysis.

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

09.5. Describe how ESG information is held and used by your portfolio managers.

09.6. Additional information. [Optional]

External ESG ratings provide a useful starting point for our E integration process but we firmly believe that they have limitations both in the breath of their coverage and the way they analyse companies. Therefore, we augment this input with our own internal research in order to capture the nuances that external ratings miss.

Our internal research considers ESG factors in the context of materiality. What is material for, say, a software company in terms of sustainability is likely to be completely different to what is material for a food retailer. Consequently, we attach varying weights to the individual factors for different industries and also compare companies to their global peers, rather than the overall market. The RI team provides regular training to our investment managers on sector specific ESG issues.

When conducting fundamental analysis on a company, our investment managers use research templates which capture their own view of a company's ESG performance, 3rd party ESG ratings and proxy voting activity. In addition, research notes written by the RI team are centrally stored and available to all investment personnel.

 


LEI 10. Aspects of analysis ESG information is integrated into

New selection options have been added to this indicator. Please review your prefilled responses carefully.

10.1. Indicate which aspects of investment analysis you integrate material ESG information into.

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

10.2. Indicate which methods are part of your process to integrate ESG information into fair value/fundamental analysis.

          Global Sustainable Equity Fund - in-depth sustainability analysis is a component part of the fundamental analysis that we undertake.
        

10.3. Describe how you integrate ESG information into portfolio weighting.

We manage concentrated equity portfolios, where stock selection is the key driver of performance. The rigour and depth of our fundamental research is central to this approach and the assessment of material ESG issues, where there are clear linkages to key business drivers, is an important element of this. This analysis, in turn, drives our conviction in a stock which in turn also influences portfolio positioning/weighting.

ESG will also influence equity portfolio construction in two other ways. Firstly, in regards to our inter-sector views (e.g. the political risks attached to the UK utility sector) and secondly, in funds which are able to invest in multiple regions, our exposure to regional market weights (mostly driven by corporate governance).

ESG integration can lead us to increase or decrease a stock's weighting in a portfolio and indeed, the most powerful evidence of ESG incorporation is often in the stocks that we do not hold.

10.4. Describe the methods you have used to adjust the income forecast/valuation tool.

Our teams follow our FVT equity investment process; Fundamentals, Valuation, Technicals. ESG factors are considered most explicitly in 'fundamental' part of this analysis. However, this in turn drives valuation.

When assessing the fundamentals of a company, we look for signs of persistency of returns, underestimated size of market and an inflection point in growth. Each of these may be affected positively or negatively by ESG factors and it is these impacts we use to adjust our valuation forecast.

For example, a company may have developed a revolutionary new technology in response to a social challenge faced by society. This may lead us to believe the company can rapidly take market share and increase revenue exponentially. We would model the effect of this in our forecasted financials that provide the inputs for our discounted cash flow valuations. In addition we would also use these forecast to adjust the prospective valuation multiple we would attach to the business.

Ultimately, our financial forecasting will incorporate a number of inputs, of which ESG factors are one of many, to determine the intrinsic value of a company.

 

10.5. Describe how you apply sensitivity and /or scenario analysis to security valuations.

Our bottom up analysis of each stock involves forming a view on the fundamentals of company and using this to provide inputs to various valuation metrics in order to derive a valuation for a company. This helps us to understand what the market is currently pricing in and whether we agree or not.

As ESG factors are incorporated into our fundamental analysis, they naturally form part of the scenario analysis used in our valuations. Specifically, this will include detailed consideration of the ESG risks and opportunities faced by a company and how the impact, positive or negative, these could have on sales volumes, average selling prices and profitability.

For example, we have observed that consumers are increasingly willing to pay a premium for products which are considered sustainable, such as ethically sourced foodstuffs. As a result, when analysing food companies which place a particular emphasis on having an ethical and sustainable supply chain, we may forecast scenarios where volumes and average prices are higher than their peers, as they capture value from this.

10.6. Additional information. [OPTIONAL]

Fundamentals

Valuation analysis has little value without an understanding of the fundamentals. The key thing we look for are companies with strong fundamentals that will persist, or improve, for longer than the market expects. This in turn leads to a higher valuation and to better momentum factors. Key to the analysis in each area is evaluating if the fundamentals of a company are improving or deteriorating.

Valuation

Once we have a view on the fundamentals, valuation helps us understand what the market is currently pricing and whether we disagree. We consider both absolute and relative valuations in our assessment. From an absolute perspective we use discounted cash flow (DCF) analysis; from a relative perspective we consider both historic and peer comparisons. We believe in using DCFs as a guide rather than as the source of the perfect answer.

Technicals

We all like to sell at the top and buy at the bottom, but our process encourages us to wait for meaningful turning points and consolidations before acting. Share prices often change before consensus views do and this can make valuations look optically expensive (or cheap) in the short-term, which may provide us with a potential investment opportunity.


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