Active
ownership

Climate Transition
Engagement Programme (CTEP)

Effective and responsible active ownership is part of our fundamental investment approach.

We believe persistent and constructive dialogue with issuers and corporates is vital to preserve and enhance the value of assets on behalf of our beneficiaries and clients. This is achieved through voicing our support for more sustainable practices and gathering insights through engagement and research to inform investment decisions.

CTEP is our bespoke engagement programme targeting all companies invested in our Climate Transition franchise. Its objective is to help the fund achieve its aim of positively influencing climate-related behaviour and help generate competitive returns.

Watch our video interview with Louise Wihlborn, ESG Analyst at Aviva Investors.

We will measure success based on company alignment with our expectations. Within three years of inclusion in the portfolio, companies should evidence progress against two expectations:

Set near-term SBTs validated by the Science-Based Targets initiative ("SBTi")¹¹, consistent with a 1.5°C pathway. The Intergovernmental Panel on Climate Change’s Sixth Assessment report calls for net global emissions to decline by about 45 per cent from 2010 levels by 2030 to comply with a 1.5°C pathway. In our view, SBTi-validated SBTs provide a clearly defined pathway for companies to reduce GHGs in line with Paris Agreement goals.

Provide annual public disclosure to The CDP’s climate change questionnaire¹² and strive to continuously improve performance. CDP’s data set and resulting scores are a key resource in identifying and managing ESG and climate-related risks within our portfolios. It is the most complete source of self-reported corporate environmental data in a standardised and comparable format, widely used throughout financial markets.

¹¹Science Based Targets, ¹² CDP

Monitoring progress

Company performance against these expectations will be determined by an annual qualitative assessment. Although all companies are regarded as demonstrating leadership relative to peers in one or more aspect of their environmental performance, all companies have more to do. As such, companies are categorised across five grades (1-5) to indicate the extent to which they meet our expectations. A supplementary bonus-malus overlay is added to reflect our views on the company’s sustainability performance and culture of engagement. This table provides a scoring breakdown for each ‘alignment’ level and indicates what each typically means.

Alignment Level	What this typically means
1	The company is aligned and shows best practice.
2	The company is proactive and demonstrating significant alignment.
3	The company is active and demonstrating clear action to align.
4	The company is reactive and demonstrating limited action to align.
5	The company is inactive and not aligned.

Evaluation results

Below is a snapshot of how companies score and rank against our alignment framework and specific requests for change. The analysis is accurate, as of December 31, 2022.

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Progress against Ask 1:

SBTi alignment

Progress against Ask 2:

CDP alignment

Escalation approach

We hope to maintain open dialogue and partnership with companies as they evolve and strengthen their respective strategies, management and reporting in alignment with our asks.

There will be times, however, when our concerns have not been adequately addressed. In such circumstances, we are prepared to escalate specific areas of concern to affect the change we seek.

Intervention will generally begin with a more focused project of intervention aimed at securing changes to the board, management, practices or fund. We will seek additional meetings with company management to enhance our understanding of their stance and help the company to understand our position. Should this initial step fail, we may consider further escalation. For example, we may ask to discuss issues with executive and/or non-executive directors, work with other institutions and investors to press for change or exercise our voting rights against the board.

Ultimately, our willingness to stay invested and/or provide future capital will be determined by the extent and pace to which companies demonstrate meaningful progress over time and respond constructively. Where our escalation process has proven unsuccessful in delivering the changes requested and we do not believe the company will address these concerns, we are committed to making the ultimate sanction of divestment.

A sample of our approach to escalation and the tools available to us is provided below and can be found in our annual Responsible Investment Review, available on our website. Note that the escalation pathway for each company will be decided on a case-by-case basis.

Read our Annual review

Intensified dialogue

Increase frequency of engagement and communications of expectations
Increase formality of engagement (e.g request meeting with more senior roles - Chair, CEO)
Engage with company brokers or advisors

Collaboration

Create or join a collaborative investor engagement
Consult or partner with other stakeholders (e.g. banks, creditors, customers, suppliers, NGOs) to increase influence

Voting

Support relevant shareholder resolutions
Vote against appropriate management resolutions
File/ co-file shareholder resolutions
Nominate new board directors

Public pressure

Public statements and press comments
Attend and speak at general meetings
Pre-declare votes / publish more detailed vote rationales

Macro reform

Engage with legislators, regulators and other standard setters to galvanise systems change

Portfolio allocation decisions

Threaten divestment or take steps to reduce or sell holdings

Litigation

Seek damage through utilising mediation or other legal avenues

Sample of escalation options available when engagement is not resulting in desired change at expected pace

Engagement progress in 2022

During the first year of the engagement programme, we made significant progress cultivating relationships with holdings held in the Climate Transition Global Credit Fund and influencing change across multiple organisations.

	CTGC Engagement Programme	Total Aviva Investor Engagements
Number of engagements	130	3328
Percent of substantive engagements	92%	43%
Number of wins	31	366
Percent of wins that are material	81%	53%

Phase 1 of CTEP launched in February 2022 when letters were sent to all Board Chairs communicating our expectations. As of December 31,2022, substantive engagements¹³ have been undertaken with the entire focus group, 85% in form of bespoke letters and 15% compromised of one-to one meetings with company representatives, such as members of the Board, senior executives, or managers of specialist areas.

¹³ Substantive engagements refer to engagements where we have set a specific and tailored engagement objective related to change we are looking to see, and the engagement involves in-depth dialogue on the matter.

Key ‘Successes’

Since its inception, 31 engagement ‘wins’ have been delivered, defined as where we have seen progress in corporate behaviour in line with our programme asks. 55% of these wins are from companies either committing a SBT or getting a SBT validated, such as NatWest who formally responded to the CTEP engagement letter in March 2022 outlining its actions against the SBT ask, in December 2022 NatWest had its near-term SBT validated by the SBTi which is categorised as a material win.

The remaining 45% of wins are derived from companies publicly submitting to CDP for the first time or improving 2022 CDP Climate Disclosure scores, for example in an engagement call with Ashtead in October 2022 the company emphasised its commitment to continuing to improve its CDP Climate scope, in December 2022 we marked a material win against the holding as it improved its score from a ‘B-’ to a ‘B’.

Progress against
SBT Ask:

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Progress against
CDP Ask:

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Companies have typically been receptive to our engagement asks, welcoming our feedback and discussions on these important topics. There have been several areas of progress and learnings, highlighted below:

40% of holdings in the Climate Transition Global Credit Fund have now set a near-term SBT (by 2030), up from 30% at the beginning of the programme. As noted above we view SBTi validation as a key indicator of the company’s commitment to drive the ambitious and rapid transition of its business profile. The materiality of this progress is significant as when a company sets a SBT pressures from the target will proliferate through a company’s value chain, encouraging better climate practice among companies outside the scope of the strategies. This is particularly significant in terms of real-world emission reduction as 50% of SBT wins observed have come from high impact sectors¹⁴.

The vast majority have also enhanced disclosure of decision-useful information about their identification, assessment and management of climate risks and opportunities. In Particular, 44% of holdings have attained either an ‘A’ or ‘A-’ in the 2022 CDP Climate Change Disclosures. This progress is encouraging as disclosure informs better decision-making by companies and their stakeholders.

By going through the process of measuring and providing data on their environmental impacts, risks, opportunities and strategies, companies can more clearly see what most needs their attention and where the most effective levers of change lie - what isn’t measured cannot be managed. Greater transparency also provides the essential foundation of accountability. Only with transparent, consistent and comparable disclosure can a company’s investors and broader stakeholders track corporate action and assess whether companies are acting in line with their public commitments and stated values.

¹⁴ High impact sectors are classified as the sectors which cumulatively generate 80% of either scope 1, scope 2, scope 3 upstream or scope 3 downstream emissions. We believe implementing change in the few most impactful sectors will bring about the greatest change.

Key challenges

Notwithstanding this progress, there is clear scope for improvement across the focus group. We have outlined below key challenges observed first year of engagement; and have factored these insights into our ongoing assessment of these companies’ performance and sustainable growth projections.

CDP disclosure remains a key loophole: We acknowledge that companies are receiving increasing requests from investors to participate in various initiatives, however during our 2022 engagements with holdings in the financial sector we noticed a growing consensus of companies finding the CDP Climate Change Disclosures too arduous and deciding not to disclose anymore. Moving into 2023 we will engage with CDP to understand what is being done, top-down, to ensure participants in the initiative continue to disclose.

Barriers to target commitment: During the conducted engagements a reoccurring theme was raised in response to questions prompting why organizations were yet to commit a SBT with the SBTi. Many companies used the lack of SBT sectoral pathways as a reason not to make such commitments, such reasoning has been most prevalent in the Chemicals and Oil and Gas sectors. However, whilst the sectoral pathways provide sector specific guidance, the SBTi provide a general decarbonization pathway that can be adopted by most companies.

Although we are paying close attention to the development of the SBTi’s sectoral decarbonization pathways, due to the need to take action and decarbonize in the near-term to avoid the most adverse impacts of climate change by aligning with 1.5°C, we encourage those holdings without the sectoral guidance to pursue the general SBT pathway (apart from those in the oil and gas sector, in which the SBTi are not accepting commitments). We do however expect an increase in companies committing SBT’s as having formally validated emissions reduction targets becomes a cost of business and companies push its necessity through their supply chains.

Technological constraints impeding ambition: In hard to abate sectors, we have frequently noted that the technological lag of sustainable products is a key barrier preventing decarbonization targets from being achieved. For example, in the industrial rental sector, there’s few economically viable electric alternatives for heavy machinery such as cranes, construction trucks, and construction equipment – as the predominant source of emissions in such business models, attaining an emissions reduction target or getting a validated SBT is challenging. In such scenarios, we strongly support the development of holistic climate risk identification and management processes as well as a robust climate transition fund, both of which are supported through submitting a climate change disclosure to CDP.

Company case studies

Below, we include a few examples of how the insights gained through our engagement programme have fed into our investment decisions.

Level	Case study
Union Pacific Alignment Level 1	In 2022 Union went above the asks of the engagement programme by getting its long-term, and net-zero targets validated by the SBTi. This is an example of how we strive to hold companies within the franchise that are continuously striving to evolve their organisations to be more resilient in a low-carbon economy and warmer world.
Danfoss Alignment Level 2	Danfoss' climate journey and progress can be clearly evidenced from both its recent CDP and SBTi commitments. In 2021 Danfoss submitted to CDP for the first time, in 2022 it released its first public response and attained an A- categorising it as a leader within its field. In 2022 Danfoss also got its near-term SBT validated by the SBTi.
Newcrest Alignment Level 3	Newcrest falls within the Gold Mining sub-industry which typically generates significant scope 2 emissions, therefore is categorised within the t-risk model as being in a high impact sector. Therefore after a meeting lead by the Climate team it was a massive success for Newcrest to get its CDP response publicly scored for the first time since it started to submit in 2015.
Waste Connections Alignment Level 4	Whilst Waste Connections has not participated in CDP or the SBTi, the company has demonstrated an eager responsiveness to engagements. Waste Connections provided a formal response to the CTEP letter resulting in a virtual meeting that provided insight into the companies climate fund, targets and future ambitions. As a result Waste Connections was allocated additional weighting in the AI overlay, increasing it from a level 1 to level 2 aligned holding.
Citigroup Alignment Level 5	Citigroup has not submitted a target to SBTi and in 2022 decided against submitting a response to be scored to CDP. In previous years Citi has been classified as a leader scoring either an A or A- for the past 7 years. This is an example of where our engagement efforts have failed, however in response to this we will target this company and others who have followed trend in our 2023 engagement escalation actions.

Trane Technology

Issue

The building product sub-industry is classified as high impact due to cumulatively accounting for 80% or scope 2, scope 3 upstream and scope 3 downstream emissions¹⁵. Compared to other CTF holdings within the building product sub-industry Trane Technology is a clear leader as in 2022 it attained a Level 1 alignment score, where the average of other companies in the same sub-industry is Level 4 aligned. As both a transition holding and a solution provider we engaged to gain a greater understanding of how the organisation is not only transitioning its business to align with net zero by 2050 but also how it helps support the wider energy transition as a solution provider.

Action

During the call Trane Technologies informed us that the organisations ambition to support the transition aligned not only with the previously identified solution theme of HVAC technologies being used to cool homes, but also the issue that 10% of worlds GHG emissions linked are to food loss in the cold chain. This is food loss prior to it reaching a consumer, particularly in regions around the world where the cold chain is not mature (e.g., Brazil). Trane Technologies has a significant presence in this market as a producer of HVAC products, so this was identified as a great opportunity for Trane to aid the maturing of the cold chain.

Outcome

This is an example of how businesses are not only focusing on orientating their own organisation to become more resilient in a low carbon economy, but also a good example of how opportunities can be identified in the transition that will generate material change and support the transition throughout a company’s value chain. It was great to understand how Trane planned to use its products to support real world problems and this solidified our view that the company is a leader among its peers.

Since our meeting with Trane Technologies, we have referenced its recent progress as an example of best practice in subsequent engagements with companies attaining lower alignment levels. Moving into 2023 we plan to focus our engagement efforts on level 4 and 5 aligned companies where we will continue to use Trane as an example of best practice.

¹⁵ Analysis based on CDP clean and complete dataset

American Bank

Issue

The climate crisis has become the defining challenge of the century. According to data from S&P Global Sustainable, 90% of the world’s largest companies have at least one asset exposed to climate risk. Within this, over a third of the companies exposed can expect the value of their assets to drop by at least 20%. The banking sector is not immune to this and must also take urgent action to protect itself and the planet. Given the importance of the sector, we held an American bank as a transition company within the Climate Transition (Global Credit Fund).

Action

Our Climate Pillar analysts attempted to engage with the American bank since February 2022 on numerous occasions as part of the Climate Transition Engagement Programme (CTEP), with the aim for the company to set science-based emission targets and disclose to the Carbon Disclosure Project’s (CDP) Climate Change questionnaire. Here, we outlined that the company was targeted due to the lack of progress against the asks against CTEP.

Outcome

We were disappointed by the company’s failure to engage with us on climate related issues as well as making a lack of progress against the key asks of the programme. Despite some initial favourable views, we took the decision to divest all holdings in the Climate Transition Global Credit Fund. Climate concerns continue to remain a significant overhang on our view of the company, and hence we will closely monitor the company’s progress.

Priorities ahead

In 2023, we will continue to use this targeted programme alongside our broader climate stewardship activity at Aviva Investors as an important tool to drive the low carbon transition.

We will focus on poorer performers in the focus group, and as noted above, will adhere to an escalation pathway that could lead to divestment if insufficient progress and responsiveness is evidenced by portfolio companies throughout the specified life time of the programme.

As 2022 was the first year of CTEP, no action was taken by way of escalation against companies. We recognise the challenges of implementing these asks and that strategic changes take time to be meaningfully implemented into a company’s processes. However, progress will be considered within our 2023 AGM activity, such as voting on special and ordinary resolutions.

Our global voting policy provides more details on our approach and perspectives on governance and sustainability best practice. Our annual Responsible Investment Review provides more details on our approach to escalation. These documents are available on our website.

View these documents