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.