responsible investment & the stewardship...

Responsible Investment & The Stewardship Funds

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2 Responsible Investment & The Stewardship Funds

What this guide covers

We hope the information in this guide is helpful and that it broadens your knowledge of what it means to invest responsibly, how we do this at Aviva and why we believe it’s important to deliver responsible investment solutions for our customers. We also explain how we are going about this.

Here’s what the following pages cover: The importance of responsible investment 3

Our expertise 4

Our approach to responsible investment 5

Stewardship philosophy and criteria 6

Exclusions, engagement and outcomes 7

Governance of the Stewardship Funds 10

The Stewardship Lifestyle Strategy in action 11

Strengths & Limitations of Ethical Funds 13

Meet the team 14

Get in touch 16

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The importance of responsible investment

“The planet does not have time for excuses. Investors have a central role to play in moving the world to a low carbon future; this collaboration shows how we can all take better decisions, for our customers and for the environment. Aviva will keep calling for proper disclosure from the companies we invest in, while working with regulators and policymakers to make sure capital markets properly take account of these risks. The cost of doing nothing is far greater than any costs incurred by taking action.”Maurice Tulloch, Aviva Group CEO

“To us, responsible investment means investing our clients’ money to deliver superior long-term sustainable returns, being responsible owners of the assets we manage on their behalf, and leveraging our influence to help shape a more sustainable future.”Abigail Herron, Global Head of Responsible Investment, Aviva Investors

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Our expertiseResponsible investment is something we’ve been doing at Aviva for decades...

and now we’ve applied our expertise to create an integrated investment solution for the customers of our Workplace Savings and Retirement Business.

Our commitment to responsible investment has a long track record. We’ve been at the forefront of responsible and sustainable investment for 35 years; from being the first carbon-neutral international insurer, to being awarded the UN Momentum for Change Award in 2017 in recognition of Aviva’s commitment to reducing its environmental impact and including helping to author the world’s first corporate governance code and the UN Principles for Responsible Investment.

1994 1995 2001 2006 2007 2010 2012 2014 2015 2016 2017 2018 2019

Aviva Investors among first asset managers to publish Corporate Governance Voting Policy

At UN Summit Aviva pledges to ‘balance of economic development, the welfare of people and a sound environment, by incorporating these considerations into business activities’

Aviva makes its operations carbon neutral

Aviva Investors is founding signatory of the Principles for Responsible Investment

Aviva is founding signatory to ClimateWise and Accounting for Sustainability Principles

Aviva Investors in vanguard of signing the UK Stewardship Code

Aviva Investors founded Corporate Sustainability Reporting Coalition with call to action at Rio+20 Conference

Aviva is founding signatory of Principles of Sustainable Insurance

Launched Aviva Roadmap for Sustainable Capital Markets & Sustainable Capital Markets Manifesto

Mark Wilson speaks at UN General Assembly on Sustainable Finance

Aviva published Strategic Response to Climate Change & actively participated in COP21

Aviva Investors joined Investor Forum Board

Aviva Investors asked to join the Financial Stability Board Taskforce on climate-related financial disclosures

Aviva Investors asked to join European Commission’s High Level Expert Group on Sustainable Finance

Aviva discloses against TCFD recommendations

Aviva launches Stewardship default solution

Aviva brings Stewardship fund range ‘in-house’

Aviva Investors founding CDP signatory (previously Carbon Disclosure Project) & first asset manager to formally integrate corporate responsibility to voting policy

Aviva starts reporting on environmental impacts of business

Stewardship Lifestyle Strategy We’ve launched a new lifestyle strategy for workplace pension clients which incorporates both ethical and environmental, social and governance (ESG) considerations. The strategy gives our customers the opportunity to secure a future for themselves and their families through the Stewardship Funds, while actively contributing to a sustainable long-term future for the world around them.

The Stewardship Lifestyle Strategy can be used as either a default investment solution or as an alternative to a scheme’s existing default arrangement.

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Aviva Investors’ approach to responsible investmentAviva Investors uses its influence and experience to support and promote the long-term sustainability of capital markets, economies and society, led by a dedicated Global Responsible Investment (GRI) Team of 19 professionals with significant experience in ESG. Aviva Investors focuses on integration and active ownership to deliver positive outcomes from its approach to responsible investment.

IntegrationThe GRI team works together with fund managers and analysts to integrate ESG considerations into their investment process. The GRI team generates macro, thematic, industry, security and asset specific qualitative ESG insights to enhance investment processes. They also maintain proprietary ESG data models combining internal and external data to give investment teams quantitative assessments of ESG risks at a security and portfolio level. The ESG data models are supplemented by additional fund manager and analyst briefings provided before company meetings, votes or investment decisions.

Active ownershipAviva Investors uses its influence to promote good practice among those companies in which it invests, and to gain insight and reduce investment risk on ESG issues for its clients. In 2018, Aviva Investors voted on 54,335 resolutions at 4,713 shareholder meetings, engaged with 2,938 companies and worked alongside other investors and civil society organisations through more than 30 collaborative initiatives. Aviva Investors’ engagement approach is designed to deliver impact across all portfolios.

“At Aviva Investors, we’ve always believed that companies conducting their business in a responsible and sustainable manner are more likely to succeed over time, benefiting our customers and society as a whole. That’s why we were one of the first global fund managers to integrate environmental, social and governance (ESG) issues into our investment decision-making and one of the first to express our views through the power of shareholder voting.”Euan Munro, Chief Executive, Aviva Investors

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Stewardship philosophy and criteria PhilosophyLaunched in 1984, the Stewardship Funds have a proud heritage as the UK’s first ethical fund range, while also incorporating environmental, social and governance (ESG) considerations. The aims of the Stewardship Funds have remained broadly consistent:

1. Exclude companies that do not meet certain ethical standards or that harm society or the environment

2. Support companies that make a positive contribution to society

3. Encourage better business practices through shared ownership and dialogue

The Stewardship Funds’ philosophy recognises that the contribution companies make to a sustainable society depends both on the products and services they provide and the way they provide them. Shareholders have a responsibility to address these issues actively with the companies they invest in to deliver a positive outcome for their customers, suppliers, employees, local communities and the environment.

CriteriaCompanies and their shareholders can and do make a positive contribution to society. However, companies can also cause ethical, social and environmental issues by, for example: making harmful products; acting without regard to customers, employees and the communities in which they operate; polluting the environment; or failing to have acceptable governance practices.

Stewardship aims to determine whether the benefits delivered by a company or a sector outweigh the potential harm they may cause when creating those benefits and if, as shareholders, we believe we can influence them to reduce the harm and increase the benefits.

Companies generally operate in such a way that some aspects of their activities are acceptable to Stewardship while others are not. In some instances, failings may not be significant enough to disqualify a company from inclusion in the portfolio. In such cases, Stewardship takes a balanced view across the company’s activities.

The Stewardship Funds investment approach is based on three layers, and we’ll cover them in more detail next:

1. Exclusions – what a company does

2. Engagement – how a company goes about its business

3. Outcome – measuring the ESG performance of the companies we invest in at a fund level.

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Exclusions, engagement and outcomes Layer 1: ExclusionsSome sectors and activities will always conflict with the values of the Stewardship Funds.

Below we highlight our negative screening criteria and the reasons for excluding companies from the Stewardship Funds:

Ethical & Social ExclusionsIssue Negative screening criteriaAdult entertainment, pornography and violence

• >10% of turnover from adult entertainment or pornography.

• >10% of turnover from violent video games.

• Any involvement in the manufacture of guns.

Alcohol • >10% of turnover from the manufacture of alcoholic products.

• >25% of turnover from the distribution or sale of alcohol products (e.g. retail, hotels, restaurants and leisure industries).

Animal welfare – animal testing • Any involvement in the development and manufacture of non-medical related products (such as cosmetics, personal care, household cleaning products) where this has involved animal testing and where the company does not disclose an animal testing policy or statement.

• Any involvement in providing animal testing services and where the company does not disclose an animal testing policy or statement.

Animal welfare – fur • Any involvement in production or design of fur pelt, raw materials and products containing fur or fur trim. It also includes companies that hunt, raise, trap animals for their fur.

Endangered species • Involvement in the retail of threatened species, or components thereof, with insufficient action to prevent it.

Gambling • >10% of turnover from gambling related activities.

Genetic modification • Companies that genetically modify plants (e.g. seeds, crops) and other organisms intended for agricultural use or human consumption.

Labour standards, human rights and Health & Safety controversies

• Companies that are the subject of severe controversies related to health & safety breaches or systematic failure to protect human rights and labour standards, with no evidence of serious or lasting remedial action.

Military – weapons and weapon systems

• Any involvement in the manufacture of whole weapons systems, components or support systems (including conventional, Biological-Chemical, cluster munitions, depleted uranium and nuclear weapons).

Tobacco • Any involvement in the manufacture of tobacco related products.

• >25% of turnover from distribution or sale of tobacco related products (e.g. retailers).

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Environmental ExclusionsIssue Negative screening criteriaChemicals • Any involvement in production of chemicals restricted by the

following international agreements: the Stockholm Convention, Montreal Protocol and OSPAR Priority List. This includes persistent organic pollutants, PCBs and CFCs. (Note manufacturing lead compounds is a Layer 2 engagement issue).

Climate change - Aviation • >10% of turnover from aviation related activities i.e. airlines, airport operators and aircraft manufacturers.

Coal • >25% turnover from thermal coal mining or coal-fired power generation.

Oil • >10% turnover from oil sands extraction.

• >25% turnover from oil operations, including pipelines.

• Any involvement in oil operations in the Arctic.

Nuclear power generation • >10% of turnover from nuclear power activities.

• Any company deriving revenues from the mining of uranium.

Pollution • Companies that are the subject of severe controversies related to environmental pollution, with no evidence of serious or lasting remedial action.

Layer 2: EngagementAt its simplest, Stewardship means taking responsibility for something entrusted into our care. We monitor, engage and, where appropriate, intervene on matters that may affect the long-term value of investee companies and the capital invested in them.

We adopt a two-tier approach to engagement:

Tier 1Companies are encouraged to have, as a minimum, strong sustainability policies and systems for the following three areas:

a) Quantitative target to reduce greenhouse emissions, disclosure of data on water use and waste

b) Policies to prevent discrimination, child and forced labour, globally applicable human rights policy

c) Commitments to improving gender and ethnic diversity across the business and in particular at a board and senior management level.

Tier 2The Stewardship Funds also engage on the three issues below in depth:

1. Climate change: the team focuses on identifying which companies could have a better approach to climate change.

a) Adopt Science Based Targets for emissions reduction to prove commitment to Paris Agreement 1.5C goal

b) Report publicly according to the Taskforce for Climate Related Financial Disclosure recommendations

2. Board diversity: identify holdings which have low representation of women on the board and encourage them to meet the 33% target set by the UK Government’s Hampton Alexander Review

3. Plastic: engaging with consumer goods companies to encourage the development of strategies to reduce, reuse and recycle plastic far more effectively.

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Engagement Summary since 2018

Conducted ~ 418 engagements with 153 companies

Key Engagement Areas

Climate Change – 110Plastics – 9Board Diversity – 20

Voting Highlights

We voted at 99 company meetings on 1,849 resolutions for the Equity Funds Including; Voted against/abstained at 8 companies for lack of board diversity and at 6 companies for environmental and social concerns. This included The Stewardship team voting against the Reports & Accounts of John Laing Group. We also voted against the Renumeration Report for Microfocus due to pay concerns. The Stewardship team continues to engage with both companies on these issues.

Burberry The Stewardship team engaged with high-end fashion retailer Burberry. The position in Burberry has been kept in the portfolios after Burberry confirmed it was phasing out the use of fur, following engagement between the Stewardship team and the company’s management team.

B&M Value Retail The discount retail chain has added two women to its board following discussions with the Stewardship team, bringing the overall proportion of women on the board to 38%. This meets the 33% target set by the UK Government’s Hampton Alexander Review.

Standard Chartered Following engagement with the Stewardship team, UK bank Standard Chartered announced that it is to stop financing new coal-fired power plants.

Layer 3: Outcome non-financial performanceWe believe that improving the “non-financial” performance of companies is also likely to have a positive effect on their long-term financial performance. We therefore monitor the performance of the Stewardship Funds against several non-financial targets. The table below shows the performance of the Stewardship International Equity Fund against these non-financial targets.

Examples of company engagementAviva Investors took on the management of the Stewardship Funds in April 2018. Since then, the Stewardship team has set about reviewing all of the holdings in the Stewardship Funds to ensure they remain suitable for the portfolios, according to the Stewardship guidelines as outlined on the previous pages of this guide. The next step has been to engage with those companies that fulfill the Stewardship criteria but where there could be some changes. For example, the Stewardship team has successfully engaged with Burberry, B&M Value and Standard Chartered, to encourage positive change at each of these businesses, We provide more detail below:

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Layer 3 criteria April 2018 April 2019International Equity Fund

Carbon footprint (kg) per £1,000 invested 76,501 55,959

% of companies with emissions reduction initiatives 81% 74%

% of companies with absolute GHG reduction targets 32% 41%

% of companies with GHG intensity reduction targets 43% 55%

% of companies with environmental supply chain management 52% 80%

% of companies with an equal opportunities policy 73% 80%

% of companies with an anti-bribery ethics policy 71% 82%

% of women on board 25% 26%

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Reporting of ESG

Performance to Clients


ESG throughout the Stewardship processStewardship International Equity Fund – Example

The Stewardship process in actionAn integrated process focused on collaboration and engagement

Portfolio management

~50 stocks

Portfolio construction

Stewardship ESG

Suitability Review

Fundamental analysis

Screened Universe

~1300 stocks

Negative Screens

MSCI World ~1600 stocks

Integrated ESG inputs Voting

Engagement

Governance of the Stewardship FundsThree levels of oversight

1Aviva Investors’ Global Responsible Investment (GRI) team, headed by Steve Waygood, Chief Responsible Investment Officer at Aviva Investors, maintains the Stewardship policy and oversees the compliance of the portfolios daily.

2The Aviva Investors Investment Oversight Committee conducts a deep dive on environmental, social and governance issues every six months. The committee also reviews the funds, the investment policies and the holdings to ensure they continue to reflect the Stewardship philosophy and remain suitable for the funds.

3The GRI team employs a panel of issue experts to act as independent advisers on a wide range of ESG issues, to ensure we listen to a range of voices and incorporate these expert views into our thinking.

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The Stewardship Funds & Lifestyle Strategy As mentioned on page 4, we have launched the Stewardship Lifestyle Strategy. We explain how this strategy works on this page.

Fund What does the fund invest in?Stewardship UK Equity UK equities

Stewardship UK Equity Income UK equities

Stewardship International Equity Global equities including UK

Stewardship Managed Global equities and bonds

Stewardship Bond Primarily sterling-denominated corporate bonds or corporate bonds that are hedged back to sterling

Lifestyle StrategyThe Lifestyle Strategy uses the Stewardship International, Managed and Bond Funds. It has been designed recognising that the balance between return and risk will change as members progress through their retirement journey, from joining the scheme to reaching their selected retirement date. It also reflects the enhanced flexibility available to members following the introduction of pension freedoms by the government in 2015. It means that members are able to take their savings the way they want to when they come to their retirement date.

Reflecting the use of the Stewardship Funds throughout the strategy members can be reassured that, regardless of when they first invest, ethical and ESG considerations are integrated all the way up to their selected retirement date.

The glidepath for the strategy is shown below. The chart shows the underlying funds which make up the strategy and how investors’ monies are gradually moved from one fund to another during the journey to retirement.

Stewardship Lifestyle Strategy – taking customers through the journey to retirement

10

Aviva Stewardship International Fund

Aviva Stewardship Managed Fund

Aviva Stewardship Bond Fund

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%9 8 7 6 5

years to retirement

Stewardship Lifestyle Strategy

% o

f por

tfolio

inve

sted

4 3 2 1 0

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Asset allocationas at May 2019

Breakdown of the Stewardship International, Stewardship Managed and Stewardship Bond Funds

International Equity Allocation North American 50.6%

Developed Europe 26.2%

UK 10.6%

Japan 5.8%

Cash/Money Market 3.8%

Emerging Asia 2.1%

Developed Asia ex-Japan 0.9%

Managed Allocation International Equities 60.4%

UK Corporate Bonds 13.0%

International Bonds 12.1%

UK Equities 7.5%


UK Gilts 3.4%

Bond Allocation UK Corporate Bonds 44.0%

International Bonds 41.2%

UK government bonds 11.7%


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Strengths & Limitations of Ethical FundsIt is important to be clear about the strengths and limitations of ethical funds. Simply avoiding companies involved in certain specified controversial areas does not mean that those companies remaining in the portfolio are beyond ethical question. Ethics are typically personal and therefore more subjective than objective. Moreover, while clients can be reassured that they are not benefiting financially from the production of certain good or services at the thresholds specified, without the rights associated with share ownership, engaging to effect change is much less likely to be effective. Clients should therefore check that they are personally comfortable with the ethical policy and the criteria, as well as the companies in the portfolio and the Funds’ voting and engagement record, as outlined in the Funds’ Annual Report.

We also recommend that this report is read in conjunction with the Annual Review of the Global Responsible Investment team, which is on line at https://www.avivainvestors.com/en-gb/about/annual-responsible-investment-review.

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Meet the teamSocially responsible investment analysts (SRI) and fund managers sit in the Stewardship team. Together they ensure the Stewardship aims, which have been in place since 1984 and which are described on page 4, are fully reflected across the Stewardship Funds.

The analysts coordinate the extensive research into the social, ethical and environmental screens, engaging with companies on a wide range of Environmental, Social & Governance (ESG) issues and developing thought-leadership positions.

They also compile the funds’ ESG ratings as part of the layer 3 work, which is described on page 4. Funds are rated according to the ESG performance of the companies they hold. The team will then use this information to measure the long-term environmental, social and governance outcomes of the Stewardship range for our customers.

An integrated process focused on collaborationOwning a company’s shares or bonds means that the analysts and the fund managers have access to businesses and talk to them about how change, which the Stewardship team believes is in the best interests of the employees, society or the environment, can and should happen. This demonstrates the importance of engagement. The fund managers and the SRI analysts benefit from an integrated process, which encourages regular dialogue about businesses. The team taps into Aviva Investors’ long history of engaging with businesses, the asset manager’s extensive resources and strong track record in this area.

Eugenie Mathieu – Senior SRI Analyst Eugenie was part of Greenpeace International’s Forests team, where she worked on deforestation driven by palm oil, pulp & paper, cattle and soy. Previously she spent 14 years as a sustainability consultant advising major international companies, including FTSE 100s, on their environmental, social and ethical strategies and performance. Prior to consulting, Eugenie worked with EIRIS on the creation of the FTSE4Good indices in 2001, following an MSc in Business and Environment at Imperial College, London, and two years at Bain & Company

Sora Utzinger – SRI AnalystSora came to Aviva Investors from the Carbon Disclosure Project’s Supply Chain programme, where she advised companies on their supplier engagement strategies and how they could reduce their indirect greenhouse gas emissions. Prior to this, she worked at Merck and led the company’s work on the Access to Medicine Index in 2016. Sora started her sustainability journey in research roles for the UN and the World Business Council for Sustainable Development.

Richard Butters – SRI AnalystRichard joined Aviva Investors in 2014 as part of a Finance graduate scheme and spent two years in a management accounting role and two years as a Finance Change Manager. Before joining Aviva Investors, Richard worked for a leading renewable energy supplier and volunteered for a Department for International Development funded programme. Richard holds a BSc in International Management from Manchester University. He is also a Chartered Management Accountant (ACMA, CGMA).


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Trevor Green – manager of the Stewardship UK Equity FundHead of UK equities at Aviva Investors Trevor has managed UK equities at Aviva Investors since 2011. Before that, Trevor worked at Henderson Global Investors, where he was co-manager of the Henderson Managed Distribution Fund and at New Star Asset Management. He started his investment career at Capel Cure Myers in 1990 managing retail and institutional funds.

James Balfour – manager of the Stewardship UK Equity Income Fund Portfolio Manager at Aviva InvestorsJames joined Aviva Investors in 2012 as part of the Aviva Investors Graduate Training scheme, initially as UK Equity Analyst covering the Industrial, Food Retail and Consumer Staple Sectors, before becoming Assistant Fund Manager. James was appointed co-fund manager of the firm’s UK Equity Income Strategy in May 2016.

Thomas Chinery – manager of the Stewardship Bond FundPortfolio Manager, CreditTom co-manages sterling investment grade funds as well as the Pre-Annuity Tax Transparent Fund (TTF) and the Stewardship Bond Fund. Tom invests in investment grade corporate bonds, high yield bonds and government bonds, as per the investment strategy of the Stewardship Bond Fund. Tom is also a Responsible Investment Officer and is leading the efforts to ensure that ESG factors are integrated into all aspects of the credit process.

Tom has managed sterling fixed income funds since joining Aviva in 2014. Before joining Aviva, he worked at Mitsubishi Trust Bank helping to manage a credit total return treasury book.bonds and certificates of deposit.

Stewardship Fund management team

Jaime Ramos Martin – manager of the Stewardship International Fund Portfolio manager Global EquitiesJaime is a portfolio manager on the global equity team. He joined Aviva Investors from Standard Life Aberdeen where he worked as a global equity fund manager for 12 years, after roles on the US equity and European equity teams. Before this, Jaime worked at Mercer Investment Consulting.

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SP99782 09/2019 © Aviva plc

Aviva Life & Pensions UK Limited. Registered in England No. 3253947. Registered Office: Aviva, Wellington Row, York, YO90 1WR. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Member of the Association of British Insurers. Firm Reference Number 185896.

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Get in touchIf you have any questions about any of the information in this brochure, please feel free to contact us using one of the methods below.

Call:For NGP 0345 300 0484Open Monday – Friday 8:30am to 6:00pm

For My Money 0345 604 9915Open Monday – Friday 8:00am to 5:30pm

For Group Personal Pensions (GPP) 0800 145 5744Open Monday – Friday 8:00am to 5:30pm, Saturday 8:30 am to 5:00 pm, Sunday 10:00am to 4:00pm

Please note, we may record calls to improve our service. Calls may be charged, and these charges may vary; please speak to your network provider.

Email:For NGP please email [email protected]

For My Money please email [email protected]

For GPP please email [email protected]

For more information on pension changes visit:Advisers: www.fundchanges.aviva.co.uk

Employers and Trustees: www.avivamicrosite.co.uk/fundchanges

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