Sustainable, Responsible &/or ESG Policy:

Constructing a sustainably-aligned sovereign portfolio starts with a comprehensive bottom-up approach and requires a thorough country-by-country assessment. At Aegon AM, we base our sustainability methodology on the works of the Bertelsmann-Stiftung and Sustainable Development Solutions Network (SDSN) partnership, sponsored by the United Nations. Our transparent scoring methodology builds on this independent and credible framework and leverages reliable data sources. By using more than 100 indicators per country we have built an SDG scoring methodology that allows us to reflect our views on sustainability on 172 countries worldwide.

In addition to the sustainability country assessment, fundamental analysis is a vital part of our analysis. The portfolio construction stage includes conventional sovereign analysis, bringing together the strength of fundamentals (such as current macroeconomic conditions), valuations (including fair value versus market price), qualitative inputs (such as sentiment indicators and market positioning), and technicals (including price behavior or volumes). Active management is key for any sovereign portfolio as sustainability assessments are typically not directly linked to a country’s economic performance and a long term investment horizon is very important in achieving expected results.

We exclude investments in any form of government-issued debt (e.g., government bonds) from countries that systematically breach human rights or from a country whose government is subject to an arms embargo by the United Nations Security Council, the United States, the European Union or another relevant multilateral arms embargo.

Process:

We only invest in a pre-defined investment universe consisting of the most sustainable countries. This universe is based on a robust process that includes a proprietary country analysis methodology, combined with a formal approval process by a sustainable investment committee. Our methodology tracks more than 100 key performance indicators per country worldwide, focusing on the key issues that challenge sustainable development at an issuer level.

Features of our methodology include:

• A proprietary, unique way of looking at sovereigns based on the works of Bertelsmann-Stiftung and Sustainable Development Solutions Network (SSDN) partnership, sponsored by the United Nations.
• Covering 172 countries in the world, +100 indicators per issuer retrieved from independent sources.
• Information on overall scores and individual subcomponents, customized per country.
• Recognizing key differences across countries and their performance vs peers.

Our country selection analysis begins with the identification of sustainable sovereign issuers. We define a sustainable sovereign issuer as a country that is making substantial progress towards achieving the UN SDGs as a result of good policy, and whose government is able to manage risks to sustainable development.

Countries have to be classified into one of five sustainability categories:

• Leader: The country has already achieved critical SDGs and is on track to achieve others. Leaders show outstanding commitment to increase or maintain their sustainability performance. Leaders do not have sustainability risk or controversial policies.
• Influencer: The country is on track to achieve some SDGs and exhibits a clear commitment to sustainability. Influencers have limited sustainability risk and no major controversial policies.
• Improver: The country demonstrates an above average performance as compared to its development peers, but still faces significant challenges in terms of SDG achievements. Improvers have sustainability risk but continue to deliver a credible promise through policy or other means to tackle its potential controversies.
• Neutral: The country is not on track to achieve most SDGs, shows no significant improvements in its sustainability performance and seems to have no clear ambition to do so in the future. Neutral’s have sustainability risk with controversies that require monitoring.
• Detrimental: Country is not on track to achieve the SDGs, and has no intention of doing so. Detrimentals have the highest sustainability risk, with possible major controversies.

In order to evaluate and compare sustainability goals between countries and classify countries into different categories, we include qualitative and qualitative considerations in our country assessment.

Quantitative factors

• Sustainability scores: measure performance of a country on a standalone basis to help assess how far/close a country is achieving a specific SDG.
• Relative sustainability performance: measure performance versus a country’s peer group in dimensions like income or region. This comparison helps us identify leaders and laggards.
• Sustainability momentum: to assess the developments over time in scores due to policies applied in the past.

Qualitative factors

• SDG achievement: Interpret the data, qualify, clarify, and complement what was shown during the quantitative assessment. Identify the drivers behind the numbers and estimate what can be expected in the future given the current policies.
• Sustainability risk: Aims to identify any risk to a country’s sustainability performance. At this stage, the materiality of those risks to the financial profile of the sovereign is not yet considered.

Country profiles must be formally approved by the firm’s Sustainability Investment Committee. This committee consists of members of the responsible investment team and the rates & money markets team, and convenes on a monthly basis to evaluate issuers. Ad-hoc meetings are organized whenever current circumstances may require a review of a country’s sustainability profile. At a minimum, issuers are re-evaluated annually.

After evaluating this information, individual members of the committee must vote to reach consensus on the final classification. The sustainability assessment defines the investable universe; only issuers classified as ‘leaders‘, ‘influencers‘ or ‘improvers‘ are eligible for investment. As a consequence, the portfolio will not invest in countries considered not sustainable (i.e. ‘neutral’, or ‘detrimental’).

After the investable universe has been defined, we will apply our regular process for bond selection by identifying attractive points on the curve, evaluating price anomalies, finding attractive new issues or using technical indicators, and integrating ESG factors, similar to what we do with our regular government bond portfolios. Countries in the portfolio combine strong fundamentals and a high ambition to tackle the sustainability challenges as defined by the United Nations. Within this context we evaluate individual issuers and their bonds based on:

• Relative value analysis: issuers’ interest rate curves are compared in order to identify which of a country’s bonds offer better value for the amount of duration assumed. The same assessment applies to new bonds issued in the primary market, that typically include a new issue premium. Issuers are assessed using our quadrant approach, which brings structure and discipline to our research process. Each bond is analyzed based on four equally weighted dimensions: fundamentals (economic cycle and current monetary policy stance), qualitative/sentiment (risk aversion and investor sentiment), technical (volume analysis and new issuance), and valuation factors (current pricing of a bond against its fair value). Other relevant aspects of relative value analysis could be (but not limited to) carry and roll analysis, real yield analysis, and other macroeconomic comparisons such as issuance needs, etc.
• ESG considerations: non-financial material issues can have an impact on the decision to invest or divest in a bond, or adjust a bond’s portfolio weight. We aim to identify those bonds that have the potential to impact an issuer’s creditworthiness in the long run, and that may result in credit rating upgrades (or downgrades).
• Climate alignment: climate KPIs (such as GHG, CO2 emissions per GDP or CO2 emissions per capita) are used to prioritize investments. All else equal (for example, when the expected returns of an investment for the amount of risk assumed is similar), issuers with a better climate alignment profile are preferred.

Changes in fundamentals and sustainability metrics can trigger a portfolio rebalancing. Sustainability and market risks are monitored on an ongoing basis by investment team, whereas the Sustainable Investment Committee periodically reviews the sustainability adequacy of the portfolio.

In carrying out research and to generate investment ideas, the portfolio managers screen local and international news sources, official publications on monetary and fiscal policy, reports from rating agencies like Fitch or Moody’s and from a number of different banks and brokers. Macroeconomic research aids the investment team’s decision making regarding the portfolio’s exposure to systematic risk factors. The responsibility for ESG research lies with our sovereign analysts, and is supported by members of our responsible investment team.

Resources, Affiliations & Corporate Strategies:

Our dedicated responsible investment team serves as a company-wide, global resource for responsible investment practices. Team members lend their expertise to ESG integration initiatives, contribute to responsible investment product development and lead active ownership and sustainability research activities to promote understanding of ESG issues. Furthermore, the responsible investment specialists serve a central resource for responsible investment education and best practices.

As of December 31, 2022, the responsible investment (RI) team consists of 19 professionals (1)

Primary duties of the responsible investment team

RI solutions and ESG integration

• • Conduct sustainability research underpinning sustainability-themed solutions
• Support research analysts with ESG integration
• Advise on industry best practices
• Evaluate ESG training opportunities
• Evaluate external ESG research

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.

One or more Aegon Asset Management affiliates endorse the most common international guidelines and business principles and actively subscribes to them when possible. Examples include:

• 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.
• 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.
• 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.
• 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. 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.

Next to incorporating international guidelines and business principles into our investment processes in alignment with clients’ expectations, Aegon Asset Management interacts with various collaborative investor initiatives. A full overview can be found in the Aegon AM Responsible Investment Report.

Dialshifter

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

At Aegon AM, we integrate climate-related factors into our ESG analysis where relevant. Various climate-related considerations are evaluated in the firm’s proprietary ESG integration process as part of the fundamental research framework. Analysts evaluate the impact on fundamentals with an emphasis on the issuers most exposed to climate-related risks. Climate-related factors may include metrics such as carbon emissions as well as a qualitative assessment of climate risks such as stranded assets, regulatory and physical risks. Utilizing their industry, country or asset class expertise, analysts identify the most material and relevant climate related factors and assess the potential effect on fundamentals.

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 decarbonization plans. We engage with companies on a regular basis, prioritizing top GHG emitters, and discuss progress towards their targets and the realization of the 2015 Paris Agreement as the key international commitment to the climate transition.

SDR Labelling: Not eligible to use label