Aegon AM and ABN AMRO launch Impact

Aegon AM and ABN AMRO launch Impact Equity Strategy

BY EMANUELE FANELLI, SENIOR RESPONSIBLE INVESTMENT MANAGER AT AEGON ASSET MANAGEMENT, AND STEPHANIE MOOIJ, SENIOR ENGAGEMENT ASSOCIATE AT AEGON ASSET MANAGEMENT.

Due to the recent upheaval caused by the COVID-19 pandemic, it is becoming increasingly evident that environmental and social factors play a significant role in economic stability and financial returns. Impact investing can be a primary driver towards a greener, smarter and fairer recovery from the pandemic - for everyone.

Considered a subset of responsible investing, impact investors aim at investing in companies and assets that have a measurable net positive impact, while simultaneously achieving robust financial returns. Although there are ample data available to refute the prevalence of concessionary returns, this hasn’t quelled the scepticism caused by ‘green washing’ or by conveying a false impression that a company or its products are more environmentally sound than they really are. Investors are therefore cognizant of how rigorous their screening methods are being assessed. Stock selection is consequently of unparalleled importance in the impact investing process. Identifying companies that have a net positive impact on people, the environment with their products and services is at the heart of the collaboration between Aegon Asset Management (Aegon AM) and ABN AMRO Investment Solutions (ABN AMRO IS), which has led to the launch of the ABN AMRO Aegon Global Impact Equity strategy. This strategy consists of a portfolio of listed companies selected from an investment universe defined by both a top down screening focused on removing companies with high ESG risks and a bottom up positive selection based on the contribution companies have made to the Sustainable Development Goals (SDGs).

Photos: Archive Aegon Asset Management

Qualitative impact analysis

The responsibility for the qualitative impact assessment of companies in the investable universe lies with Emanuele Fanelli, Senior Responsible Investment Manager at Aegon AM. According to Fanelli, ‘quantitative impact data is at its infancy. It can be backward-looking, incomplete, and utilise methodologies which are not aligned with our impact philosophy. It is therefore paramount to complement the data provided by external parties with a proprietary qualitative methodology.’

Aegon AM’s Sustainability Analysts use a proprietary framework to measure a company’s net impact by scrutinizing how the products and services provided by the company generate positive or negative outcomes, aligned with the United Nations’ 17 SDGs.

‘This encompasses both social and environmental aspects and emulates best practice by incorporating international standards. In addition, it requires companies to take actions both consciously and intentionally, not merely incidentally.‘ Fanelli is also responsible for ensuring that he and his colleagues can track, measure and demonstrate precisely how a company’s business strategy yields positive change over time.

’We want to invest in companies that are serious about transitioning – not necessarily those that are completely

aligned with the SDGs. We search for companies that have a serious strategy to capitalise on market opportunities arising from products and services that have a positive impact. Analysing a company’s CAPEX and R&D expenditure can play a pivotal role in gauging what is driving change‘, says Fanelli.

‘Furthermore, it’s important to contextualise the positive impact with the geography and regulatory framework of where the company operates. Tracking and measuring how companies make these strategic changes is essential to evaluate their inclusion in the investable universe over time.’

The importance of Engagement

In the context of active ownership, Aegon AM’s Engagement Specialist Stephanie Mooij is responsible for the engagement efforts on behalf of the strategy. ‘Our responsible investment framework encourages engagement with companies to advocate for positive change, mitigate ESG risks and promote best practices’, explains Mooij.

She starts a dialogue with issuers to better understand how ESG issues are managed and to encourage them to improve their performance on these topics. The engagement plan for the impact strategy aims to create positive change by increasing the revenues a company generates that positively contribute to the SDG’s, decrease the revenues that have a negative impact on the SDG’s, and target specific ESG issues and incidents.

‘For example, we may encourage a supermarket chain to increase their sustainable product portfolio by including more alternative proteins or fresh fruits and vegetables. We don’t believe that it is effective to merely send letters urging improvements. We want to have in-depth conversations and establish long-term relationships with companies, forming our own opinion and not just relying on third party ESG ratings’, says Mooij.

STEPHANIE MOOIJ

The horizon for the engagement depends on the complexity of the goal, but may last three to five years. According to Mooij, the depth of the efforts varies relative to the responsiveness of the company and their openness to the Engagement Specialists’ concerns. Mooij and her colleagues engage either directly with the issuer or in collaboration with other investors to maximize influence. ‘Our milestone-based tracking method shows the progress of engagements over time. Given that the engagement goal is clearly defined, it can also be used to measure engagement success’, says Mooij.

Fanelli recognizes that when Aegon AM engages, it is not as transactional as it may seem from an external standpoint. ‘It is not as simple as 1) engaging and 2) adjusting our investment position. It is a long-term process of tracking behavioural change and getting to know the company better.’

Impact in the COVID-19 context

How has the impact investing market changed in the COVID-19 context? Mooij and Fanelli took a moment to consider the changes they have witnessed since the pandemic began in March.

Fanelli: ‘We are continually analysing companies that are trying to capture the business opportunities that were coming from the pandemic, such as in the IT or pharma sectors. The pandemic has required us to assess if there are companies providing opportunities, solutions, trying to address specific challenges related to the pandemic. It has also forced us to consider and classify certain companies in terms of heightened risk, and has elevated social factors and employee relations of more material importance.’

In some respects, the pandemic has also assisted Aegon AM’s Sustainability specialists with their qualitative assessment. Mooij: ‘There are specific cases where the pandemic has shown the true culture of companies. If you look at the meat industry for example, we got better insight into how their employees were being treated. It became extremely visible.’ Such insights can be helpful when analysing a company’s ESG practices.

In conclusion, impact investing has become more relevant than ever as an increasing number of investors seek solutions to address the large-scale social and economic consequences of the global coronavirus pandemic. Therefore, the timing is excellent for this collaboration between Aegon AM and ABN AMRO IS. The actively managed equity strategy is expected to go live at the end of this year. «