Active
ownership

Natural Capital Transition
Fund Engagement
Programme (NCEP)

Effective and responsible active ownership is part of our fundamental investment approach. Companies are heavily exposed to changes in societies and the natural environment. We believe by engaging with companies and their management, we can improve our understanding of their issues and approaches to managing them, helping us to protect or enhance the value of our investments.

The NCEP is our engagement programme targeting all companies held in the portfolio, running for three years from a company’s inclusion in the portfolio. Its objective is to help the fund achieve its aim of helping reverse devastating trends fueling the degradation and loss of nature and transitioning towards a nature-positive future.

NCEP will achieve this by asking all companies to make progress against three specific requests:

Identify and disclose the most material impacts and dependencies on biodiversity in their value chain

Set ambitious SMART targets covering their most material biodiversity impacts

Demonstrate progress against one company-specific ask, focused on where we see a company’s greatest unaddressed impact on nature.

These expectations are aligned with the latest guidance and suggested targets from the Science Based Targets Network (SBTN) and the UN’s Convention on Biological Diversity Goals and Targets.

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 currently score against our evaluation framework, ranked in categories 1 to 5. Current analysis is up to date as of 31 December 2022.

Click to interact with charts

Progress against Ask 1:

Biodiversity assessment

Progress against Ask 2:

Biodiversity targets

Progress against Ask 3:

Company-specific ask

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, despite engagement, our concerns have not been adequately addressed. Under these circumstances, we are prepared to escalate specific areas of concern in order to effect the change we are seeking.

Intervention will generally begin with more focused intervention aimed at securing changes to the board, management, practices or fund. We will go through the process of holding additional meetings with company management to enhance our understanding of their position and help the company to understand our views. Should this 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 on the following page and can be found in our annual Responsible Investment Review, available on our website⁶. 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 2022, we engaged with all companies in the portfolio, holding meetings with 67 per cent, with overall 75 substantive engagements carried out.

Phase 1 of the NCEP launched in March 2022 when letters were sent to all board chairs setting out our expectations. Companies have generally been receptive to our engagement asks and welcomed our feedback and discussions on these topics. As of year-end, 88 per cent of holdings in the portfolio had responded to our original outreach letter.

We have also undertaken 75 substantive engagements in total and at least one with each holding¹⁰, ranging from bespoke letters to one-to-one meetings with company representatives, such as members of the Board, senior executives or managers of specialist areas.

Since inception, two engagement ‘wins’ have been delivered, defined as where we have observed changes in corporate behaviour in line with our asks. We have also seen examples of more gradual improvement, largely in the third bespoke ask, where we identified particular gaps in each company’s approach to managing natural capital risks. Here, six companies have taken steps to address our requests, which were in the areas of circular economy, water quality and quantity management, deforestation and traceability.

¹⁰ Substantive engagements are defined as 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.

	NCEP	Total engagement across Aviva Investors
Number of engagements	75	3328
Percent of substantive engagements	100%	43%
Number of wins	2	366
Percent of wins that are material	0%	53%

These charts provide a more detailed breakdown of the progress companies have made against each request of change since the NCEP launched.

Progress against Ask 1:

Biodiversity assessment

Progress against Ask 2:

Biodiversity targets

Progress against Ask 3:

Company-specific ask

Key challenges

Despite progress, there is clear room for improvement. We have outlined below some of the key challenges highlighted by companies during this first year of engagement. It is clear the implementation of our expectations is being stymied by factors arising from the broader operating and policy environment. We have factored this into our ongoing assessment of these companies’ performance and sustainable growth projections.

Lack of well-developed guidance to support companies in carrying out biodiversity assessments. Most companies’ responses indicated they were still in the early stages in this regard and waiting for further guidance before taking next steps. While this is somewhat understandable, considering full SBTN guidance was still under development, we were keen to ensure companies are not using this as an excuse for inaction, when a lot of information to support them in their approach to nature-related issues is already available. To the extent possible, we referred companies to leading practice examples we have seen from peers, such as Kering, as well as the initial SBTN guidance. We look forward to the release of more granular guidance in 2023 that will help companies produce more consistent and comparable information.

While most companies have been receptive to our request to carry out biodiversity assessments, a few have been more resistant. Typically, these are companies that do not consider biodiversity to be a material issue for their company and/or consider their current approach sufficient for their level of risk.

In these cases, there appears to be a reluctance to take on additional work, especially where materiality assessments may indicate other issues are more material to stakeholders.

In several instances, companies have communicated that our asks around biodiversity assessments and nature-related targets may be too ambitious at this time in a non-European context, particularly in countries where environmental legislation may be less advanced or public opinion on environmental action is less supportive.

In these cases, we have encouraged companies to engage with policymakers or relevant regulators to help promote the adoption of more forceful environmental laws and regulations, for instance around recycling of products post-use, as well as to contribute to awareness-raising on environmental issues of their customers. We have also fed these insights to our macro stewardship team to embed into their campaign work with governments and regulators (see macro stewardship section).

Company case studies

Here are example case studies where we have completed objectives or can demonstrate progress. The insights gained through our engagement programme routinely feed into our investment decisions.

Company	Case study
Stora Enso	Stora Enso has yet to provide sufficient reassurance on its approach towards sustainable sourcing and certification of its wood supply. In particular, transparency about the percentage of wood sourced from areas where biodiversity assessments are carried out, and its plans on peat and coal. We have halved our position size and will continue to keep progress under review.
Abbott Laboratories	Although Abbott Laboratories is still some way off from meeting our asks, it has taken some encouraging steps as part of its environmental fund by committing to setting Science-Based Targets and by setting quantifiable targets to reduce water use intensity and emissions, as well as improve circular waste management.
AXA	AXA made progress on carrying out a biodiversity impact and dependency assessment by publishing, for the first time, an analysis of the biodiversity impacts of its direct operations and investments.
Crown Holdings	Crown Holdings reported it is using the Integrated Biodiversity Assessment Tool (IBAT) to assess beverage manufacturing plant locations in Brazil, Mexico and Europe. We view this as an important step towards carrying out a more fully-fledged biodiversity impact and dependency assessment.
Bureau Veritas	Bureau Veritas has disclosed its intentions to conduct a biodiversity assessment and set related targets, as well as plans to increase its biodiversity-related offerings to customers. We believe sustainability certification should provide another leg of growth to the company’s top-line acceleration story, considering rapidly growing demand from companies to evidence traceability throughout their supply chains. To this end, we added to our position in Bureau Veritas on several occasions in the second half of 2022.

AXA

Issue

NCEP is focused on supporting the transition towards a nature positive economy and addressing the systemic risk posed by accelerating biodiversity loss. Given the gravity of the challenges society and the environment face, we expect all companies to continue to evolve and push the boundaries of best practice. We believe taking proactive action will put companies in a stronger position to respond to emerging risks, including changes in international and national policy, and demonstrate leadership with respect to this material issue.

Action

We wrote to the company as part of NCEP, requesting a biodiversity impact and dependency assessment, related SMART targets and a policy to stop providing insurance services to activities with a high degree of harmful impacts on biodiversity. We also met with the company to discuss these requests in further detail.

Outcome

In its Climate and Biodiversity Report 2022, published in June, AXA disclosed, for the first time, an analysis of the biodiversity impacts of its direct operations and its investments. AXA worked with Iceberg Datalab to apply its Corporate Biodiversity Footprint (CBF) tool, enabling a better understanding of the biodiversity impacts of its investments. We look forward to the company sharing its full results on this analysis in future. In terms of its own operations, AXA found most of the impact on biodiversity comes from its vehicle fleet and GHG emissions linked to its office buildings. The company has reported on actions it is taking to reduce these impacts. While this report does not yet constitute a full assessment covering the entire value chain, as recommended by the SBTN, this is a good starting point and puts AXA in a leading position compared to sector peers. We are encouraged by the overall direction of travel and look forward to seeing more granular disclosure in future company reports.

Severn Trent

Issue

UK water companies have faced recent public scrutiny relating to sewage being pumped into the UK’s waters. The Environmental Agency (EA) has set a target for 75 per cent of UK rivers to have “good” ecological status by 2027, but currently only 14 per cent of UK rivers have this status. In 2021, the EA and Ofwat launched an investigation into sewage treatment works, after checks led to water companies admitting they could be releasing unpermitted sewage discharges into rivers and streams. Whilst we identified Severn Trent as a sector leader for environmental performance, we decided to prioritise this topic for our engagement with the company as part of the NCEP, asking the company to accelerate its water quality improvement plan.

Action

In 2022, we engaged with Severn Trent on multiple occasions, requesting a significant step-up in its investments and targets on sewage released to rivers. We attended Severn Trent’s 2022 AGM, where we were one of the only investors to provide opposition to its pay report by abstaining, due to concerns over bonus outcomes related to environmental performance. Our Natural Capital team engaged further with the company in January 2023 via a meeting with the chief executive.

Outcome

The company launched its ‘Get River Positive’ pledges after our initial engagement on water quality issues, with new targets and commitments for investments. The company introduced a target that its operations will not be the reason for unhealthy rivers by 2030, based on EA measures (RNAGS), and that it will reduce spills from storm overflows to an average of 20 per year by 2025. We commend the fact Severn Trent now attributes eight per cent of all employees’ bonuses to progress made on river health – specifically, on its new pledge to ensure storm overflows and sewage treatment works do not harm rivers. This takes the total proportion of environmental performance as part of its bonus allocation up to 20 per cent.

Overall, this progress reinforces our view on the company’s commitment to improving water quality. In 2023, we will continue to track the implementation of its new targets and increased investment in preventing water pollution.

Priorities ahead

In 2023, we will deepen our engagement activity with a focus on the poorest performers, to drive the transition towards a nature-positive future.

Corporate biodiversity impact and dependency assessments will be a key focus considering the upcoming release of further guidance from the SBTN and the Task Force for Nature-related Financial Disclosures (TNFD) in March 2023.

In tandem, we will consider escalating action to encourage companies to align more swiftly with our expectations. 2022 was the first year of NCEP and therefore there was no action taken by way of escalation against companies, recognising key strategic changes take time to be implemented into a company’s business process. 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, and the 2022 Responsible Investment Review provides more details on our approach to stewardship. These documents are available on our website.

View these documents

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