Capital
allocation

Capital allocation

Wars and conflict always have an impact. Russia’s invasion of Ukraine is no different, highlighting the fragility of our globally interdependent food and energy systems. Initially it led to a knee-jerk reaction to meet Europe’s short-term fossil-fuel energy needs, and the ensuing ramifications helped create the environment for excess returns for the oil and gas sector.

As the year progressed, there was a growing focus on ensuring energy security was also in line with the low-carbon transition. Initially this was evidenced via policy announcements such as the €210 billion⁴ Repower EU, which was later dwarfed by the USA’s $500 billion⁵Inflation Reduction Act (IRA). The IRA was designed to improve the USA’s competitiveness within the green energy transition, a race which is being won by China. The EU is also considering how it can strengthen its own competitive positioning. Both Repower EU and the IRA should positively influence the climate mitigation pillar of our Climate Transition Global Equity Fund.

In addition to solutions to minimising climate change, the fund also identifies solutions that will help us adapt to the consequences of climate change. At 1.1°C above pre-industrial temperatures, we are already seeing the physical impacts of climate change writ large; from the devastating floods in Pakistan to the steadily increasing frequency of billion-dollar disasters and extreme weather events that have disrupted industry around the world.

Today, however, there is a significant gap between investment in adaptation and what is needed.⁶ But as extremes continue to manifest, we believe there will be a growing focus on adaptation.

In addition to solutions to help prevent catastrophic climate change and enable our adaptation to the changes to come, the response to climate change is a systemic one. This means entire systems, from food production to measures of economic growth, must change to facilitate the transition to a lower carbon, yet warmer, future.

Whilst attention has historically focused on the failure of governments to align national emissions projections with what is need for a 1.5°C pathway, there is now increasing scrutiny on the transition plans of all actors within the global economy, from the overreliance of carbon offsets to meet national⁷ and corporate targets to the misalignment of business models with a 1.5°C pathway. This is why our proprietary transition-risk (T-Risk) model assesses if a company’s risk management plans are commensurate with the levels of climate risk exposure and ambition to have 90 per cent of portfolio holdings having a near term SBT by 2030. We believe near-term SBTs will ensure management teams focus on achieving actual emissions reduction throughout a company’s value chain, during the next five to ten years.

⁴European Commission, ⁵ McKinsey & Company, ⁶UNEP,⁷ Land Gap

Investment process

Our Climate Transition Global Equity Fund uses an active, fundamental, research-driven approach to capture opportunities arising from the transition to a warmer, low-carbon future. The fund’s key performance driver will be bottom-up stock selection, which leverages the combined connected analytical resources of our ESG and equities investment teams.

There are over 80,000 listed stocks globally, of which over 6,000 have a market cap of over $1 billion and see average daily trading of $10 million a day or more. This is broadly what we consider our starting investment universe.

Avoid significant harm

We have baseline exclusions that extend across our business, as exclusions specific to the Sustainable Outcomes Fund Range and those exclusively for the Climate Transition Global Equity Fund. The baseline exclusions are:

Controversial weapons and civilian firearms
Fossil Fuels
Tobacco
UN Global Compact violations

Our fund-specific fossil-fuel screen is more stringent than the firm wide fossil-fuel screen, excluding companies with any revenue or volumetric exposure to coal or unconventional oil and gas; companies generating 10 per cent or more of revenues or volumetric exposure of more than 1,000 MMBOE reserves; and those with 15 per cent or more of their revenue from gas-fired generation. In addition, the screen also covers companies in the oil and gas value chain generating 75 per cent or more of their revenues from oil and gas exposure. From 2025, the screens will become increasingly strict year-on-year so that by 2040 there will be a zero-tolerance approach.

Climate Transition overlay

We then look to identify two groups of companies – solutions companies and transition leaders (note, there can be overlap between the two).

a) Transition Leaders

All companies must transition their business models, across their value chains, to be resilient for a warmer, lower-carbon future. Our T-Risk model combines a top-down sub-industry climate risk exposure assessment with a bottom-up company risk management assessment.

Step 1: Top-down climate risk assessment

Recognising climate risks vary between and within sectors, the T-Risk model works at a sub-industry classification level. There are 159 sub-industries identified by the Global Industry Classification System; by working at this level of granularity, the model can pick up on the different decarbonisation or physical risks a sub-industry is exposed to. We then categorise this risk as high, medium or low.

Step 2: Bottom-up risk management assessment

Companies are then assessed on their approach to climate risk management. We use CDP’s climate score output from its annual climate risk assessment questionnaire, issued on behalf of investors to over 10,000 companies each year. This provides a standardised, regular and scalable risk assessment, with companies assessed on factors such as:

Governance
Strategy
Risk assessment
Risk management
Targets
Disclosure
Public policy position

Step 3: Combining top-down with bottom up

We then combine the sub-industry score with the CDP climate score, with only companies whose climate risk management score being commensurate to the level of climate risk exposure of the sub-industry being suitable for our investment universe. In other words, a company in a high-risk sub-industry needs to achieve an A- or above score to be included in the investable universe.

b) Solution companies

We look for companies that generate over 20 per cent of their revenues from solutions that will help society mitigate the impacts of climate change (i.e., through reducing emissions) or adapt to the consequences of climate change. The table below shows the themes under which we classify different climate solutions.

Mitigation	Adaptation
Sustainable transport	Forestry & agriculture
Energy efficiency	Extinction
Renewable energy	Urban areas
Low carbon energy	Water
Electricity infrastructure	Health
Forestry & agriculture	Oceans
	Weather

Holdings classification

Portfolio KPIs

Scroll to view full table

2022 Data Summary table		CTGE			MSCI ACWI
		Dec 2020	Dec 2021	Dec 2022	Dec 2020	Dec 2021	Dec 2022
Fossil Fuels	Percentage weight of companies with fossil fuel reserves	0	0	0	5.6	5.7	8
Carbon emissions⁸	Weighted average carbon intensity (tCO₂e/$M Sales)	84	83.9	89.4	206.4	151.2	140.9
	Carbon footprint (tCO₂e/$M invested)	42.5	19.3	22.2	99.4	78.3	105.8
Sustainable activities	Percentage weight of companies offering clean technology solutions	63.1	58.1	50.7	36.8	38.2	36.2
Climate Governance	Percentage of companies with a CDP score >B	71.4	70.8	84.4	52.4	31.6	39.9
	Percentage of companies with SBTi⁹ ambitions	30.7	56.23	80	22.2	14	29.0
Stewardship	Voting percentage¹⁰	100	98	100	-	-	-

CTGE Source: Aladdin and MSCI as at date - 31/12/2022.

⁸ Based on 98.2% coverage for the CTGE portfolio and 99.2% coverage for MSCI ACWI.

⁹ Science Based Targets initiative, includes either set or commitment to set targets validated by the Science Based Targets initiative.

¹⁰ The percent of fund holdings we have exercised our voting rights on.

The following sample metrics are used as indicators of whether a company is positively aligned to the objectives of the fund, they are not necessarily used as an input into the decision making process to invest in the company. Principle Adverse Impact (PAI) data follows Aviva Investor’s proprietary PAI framework which is used to identify companies we deem as failing our Do No Significant Harm tests or thresholds.

Security Description	Environmental Impact Solutions - Max. % of Rev.(Wt Avg-PORT Delta NMV)	FTSE Green Revenue (UNAVAILABLE)	Company has SBTI approved Emission Target	CDP Climate Score (UNAVAILABLE)	PAI 02: Carbon Emissions Intensity (EVIC EUR Scope 1,2&3)	PAI 03: Carbon Emissions Intensity (Sales in EUR Scope 1,2&3)	PAI 05: Non Renewables Consumption	PAI 06: Energy Consumption Intensity (EUR)
ACCENTURE PLC CLASS A	2.13	1.38	T	A	Neutral	Neutral	Neutral	No data
ALPHABET INC CLASS A	2.39	7.77		A	Neutral	Neutral	Neutral	No data
AMERICAN TOWER REIT CORP	0.00		T	B	Neutral	Neutral	Neutral	Neutral
ASM INTERNATIONAL NV	0.00			B	Neutral	Amber	Neutral	Neutral
AUTODESK INC	15.80	8.70	T	B	Neutral	Neutral	Neutral	No data
AXA SA	0.00			B	Neutral	Neutral	Neutral	No data
BUREAU VERITAS SA	0.31	5.67		B	Neutral	Neutral	Neutral	No data
CAPGEMINI	2.91	11.21	T	A	Neutral	Neutral	Neutral	No data
DAIKIN INDUSTRIES LTD	2.00	87.83		A	Neutral	Amber	Neutral	Neutral
EDP RENOVAVEIS SA	95.55	100.00		See Another	Neutral	Neutral	Neutral	Neutral
EPIROC CLASS A	9.23		T	A-	Neutral	Neutral	Neutral	Neutral
EVERSOURCE ENERGY	0.05	11.07		B	Neutral	Neutral	Neutral	Neutral
HOME DEPOT INC	0.00			B	Neutral	Neutral	Neutral	Neutral
HUBBELL INC	0.29	24.94		D	Neutral	Neutral	No data	No data
IQVIA HOLDINGS INC	0.00			B	Neutral	Neutral	Neutral	No data
L&G US ESG EXCL PARIS ALIGNED UCIT
LINDE PLC	0.00	32.00	T	A	Neutral	Neutral	Neutral	Amber
MERCK & CO INC	0.00	1.22	T	B	Neutral	Neutral	Neutral	Neutral
MICROSOFT CORP	21.72	26.97	T	A	Neutral	Amber	Neutral	No data
MOODYS CORP	0.00		T	A	Neutral	Neutral	Neutral	No data
NESTE	18.68	37.44		A-	Neutral	Neutral	Neutral	Neutral
NESTLE SA	0.00	6.45	T	A-	Neutral	Neutral	Neutral	Neutral
NVIDIA CORP	39.43			B	Neutral	Neutral	Neutral	Neutral
OTIS WORLDWIDE CORP	0.00			B	Neutral	Neutral	No data	Neutral
PEPSICO INC	0.00		T	A-	Neutral	Neutral	Neutral	Neutral
PTC INC	5.17			F	Neutral	Neutral	No data	No data
RELX PLC	0.00			B	Neutral	Neutral	Neutral	No data
RENTOKIL INITIAL PLC	0.00			C	Neutral	Neutral	Neutral	No data
ROCHE HOLDING PAR AG	0.00			F	Neutral	Neutral	Neutral	Neutral
SCHNEIDER ELECTRIC	28.51	72.00	T	A	Neutral	Neutral	Neutral	Neutral
SIKA AG	1.09	6.95		C	Neutral	Neutral	Neutral	Neutral
STMICROELECTRONICS NV	8.20	12.12	T	B	Neutral	Neutral	Neutral	Neutral
T MOBILE US INC	0.00		T	A-	Neutral	Neutral	Neutral	No data
TARGET CORP	0.05		T	A-	Neutral	Neutral	Neutral	Neutral
TELEPERFORMANCE	0.00		T	C	Neutral	Neutral	Neutral	No data
THERMO FISHER SCIENTIFIC INC	1.72	0.73		B	Neutral	Neutral	Neutral	Neutral
TRANE TECHNOLOGIES PLC	2.20	30.00	T		Neutral	Neutral	Neutral	Neutral
TRIMBLE INC	5.24	35.22		B	Neutral	Neutral	Neutral	No data
UBS GROUP AG	0.00			A	Neutral	Amber	Neutral	No data
UNION PACIFIC CORP	0.00		T	B	Neutral	Amber	Neutral	Neutral
UNITEDHEALTH GROUP INC	0.00			B	Neutral	Neutral	Neutral	No data
VISA INC CLASS A	0.00		T	A	Neutral	Neutral	Neutral	No data
WASTE CONNECTIONS INC	4.95	100.00		F	Neutral	Amber	No data	Neutral
WASTE MANAGEMENT INC	14.28	100.00		B	Neutral	Amber	Neutral	Neutral
XYLEM INC	48.03	71.81		A-	Neutral	Neutral	Neutral	Neutral

As at date - 31/12/2022

Source: The Aviva Investor PAI framework is based on a Red , Amber, Green (RAG) output, with “Reds” designating that a company is breaching our Do No Significant Harm test and therefore is ineligible for inclusion in this fund.

Principal Adverse Impacts

Security Description

PAI 02: Carbon Emissions Intensity (EVIC in EUR Scope 1, 2 & 3)

PAI 03: Carbon Emissions Intensity (Sales in EUR Scope 1, 2 & 3)

PAI 04: Fossil Fuel (Strong Screen)

PAI 05: PCT Non Renewable Consumption

PAI 06: Energy Consumption Intensity (EUR)

PAI 07: Biodiversity Controversy

PAI 08: Water Efficiency

PAI 09: Hazardous Waste

PAI 10: Overall Flag

PAI 11: Mech UN Global Compact

PAI 12: Gender Pay Gap Ratio

PAI 13: Male \ Female Board Ratio

ACCENTURE PLC CLASS A

Neutral

No data

Neutral

No data

Amber

Neutral

Low Population

Neutral

ALPHABET INC CLASS A

Neutral

No data

Neutral

No data

Amber

Neutral

AMERICAN TOWER REIT CORP

Neutral

No data

Neutral

Amber

No data

Neutral

ASM INTERNATIONAL NV

Neutral

Amber

Neutral

No data

Neutral

Amber

No data

Neutral

AUTODESK INC

Neutral

No data

Neutral

No data

Neutral

No data

Neutral

AXA SA

Neutral

No data

Neutral

No data

Amber

Neutral

Low Population

Neutral

BUREAU VERITAS SA

Neutral

No data

Neutral

No data

Neutral

Amber

No data

Neutral

CAPGEMINI

Neutral

No data

Neutral

No data

Neutral

No data

Neutral

DAIKIN INDUSTRIES LTD

Neutral

Amber

Neutral

Low Population

No data

Neutral

Low Population

Amber

EDP RENOVAVEIS SA

Neutral

No data

Neutral

No data

Neutral

EPIROC CLASS A

Neutral

No data

Neutral

No data

Neutral

EVERSOURCE ENERGY

Neutral

No data

Neutral

Amber

No data

Neutral

HOME DEPOT INC

Neutral

No data

Neutral

Amber

No data

Neutral

HUBBELL INC

Neutral

No data

Neutral

No data

Neutral

Amber

No data

Neutral

IQVIA HOLDINGS INC

Neutral

No data

Neutral

No data

Neutral

No data

Neutral

L&G US ESG EXCL PARIS ALIGNED UCIT

LINDE PLC

Neutral

Amber

Neutral

No data

Amber

Neutral

No data

Amber

MERCK & CO INC

Neutral

No data

Neutral

Amber

Neutral

No data

Neutral

MICROSOFT CORP

Neutral

Amber

Neutral

No data

Neutral

Low Population

Amber

Neutral

MOODYS CORP

Neutral

No data

Neutral

No data

Neutral

NESTE

Neutral

Low Population

Neutral

No data

Neutral

NESTLE SA

Neutral

No data

Amber

Neutral

Low Population

Neutral

NVIDIA CORP

Neutral

No data

Neutral

Amber

No data

Neutral

OTIS WORLDWIDE CORP

Neutral

No data

Neutral

No data

Neutral

Amber

No data

Neutral

PEPSICO INC

Neutral

No data

Amber

Neutral

PTC INC

Neutral

No data

Neutral

No data

Neutral

Amber

No data

Neutral

RELX PLC

Neutral

No data

Neutral

No data

Neutral

No data

Neutral

RENTOKIL INITIAL PLC

Neutral

No data

Neutral

No data

Amber

Neutral

ROCHE HOLDING PAR AG

Neutral

No data

Neutral

Amber

No data

Neutral

SCHNEIDER ELECTRIC

Neutral

No data

Neutral

Amber

Neutral

No data

Neutral

SIKA AG

Neutral

No data

Neutral

Low Population

Neutral

STMICROELECTRONICS NV

Neutral

No data

Neutral

No data

Neutral

T MOBILE US INC

Neutral

No data

Neutral

No data

Amber

No data

Neutral

TARGET CORP

Neutral

No data

Low Population

Neutral

Amber

No data

Neutral

TELEPERFORMANCE

Neutral

No data

Neutral

No data

Amber

Neutral

No data

Neutral

THERMO FISHER SCIENTIFIC INC

Neutral

No data

Amber

Neutral

No data

Neutral

TRANE TECHNOLOGIES PLC

Neutral

No data

Neutral

Amber

No data

Neutral

TRIMBLE INC

Neutral

No data

Neutral

No data

Neutral

Amber

No data

Neutral

UBS GROUP AG

Neutral

Amber

Neutral

No data

Neutral

No data

Amber

Neutral

No data

Neutral

UNION PACIFIC CORP

Neutral

Amber

Neutral

No data

Amber

No data

Neutral

UNITEDHEALTH GROUP INC

Neutral

No data

Neutral

No data

Amber

No data

Neutral

VISA INC CLASS A

Neutral

No data

Neutral

No data

Amber

Neutral

WASTE CONNECTIONS INC

Neutral

Amber

No data

Neutral

No data

Neutral

Amber

No data

Neutral

WASTE MANAGEMENT INC

Neutral

Amber

Neutral

No data

Low Population

Neutral

Amber

No data

Neutral

XYLEM INC

Neutral

No data

Neutral

As at date - 31/12/2022