Active
ownership

Social Transition Fund
Engagement Programme
(STEP)

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

We believe persistent and constructive dialogue with issuers, corporates and sovereign representatives 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 to inform investment decisions.

STEP is our engagement programme targeting all companies invested in the portfolio, with a goal to help the fund achieve its aim of supporting the transition towards a more equitable society. It aims to ensure companies demonstrate robust human rights disclosure and due diligence (HRDD) and work towards implementing a credible living wage commitment.

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:

Identify, prevent, mitigate and account for how they avoid and address negative human rights impacts they cause, contribute to or which are linked to their activities through business relationships by conducting human rights due diligence.

Ensure workers are paid a living wage and support efforts to ensure workers in their value chains are paid a living wage.

Our expectations are linked to the World Benchmarking Alliance’s (WBA) Social Transformation Framework²⁰, designed to measure company contributions to the SDGs. It articulates a set of baseline expectations companies should meet to support the goal of “leaving no one behind”. Human rights due diligence, in line with the UN Guiding Principles on Business and Human Rights (UNGPs), and living wages are two of these minimum expectations.

Few companies globally are currently aligned with this standard. However, we expect all companies to make progress by conducting robust human rights due diligence, particularly in light of emerging regulation. This is an essential first step to addressing potential or actual harms that could be caused by a company’s business activities and business model.

Companies will also be expected to introduce commitments to pay a living wage across the value chain. Significant barriers prevent companies from making commitments on this issue – just four per cent of all companies have targets or commitments toward paying a living wage.²¹ However, it is widely recognised living wages are critical for tackling inequality, as well as offering tangible business and economy wide benefits.²²

²⁰ Social Transformation Framework | World Benchmarking Alliance²¹World Benchmarking Alliance²²The Buisness Commission to Tackle Inequality

Monitoring progress

Company performance against these expectations will be determined by an annual qualitative assessment. Although all companies are regarded as demonstrating leadership in one or more aspects of their social performance, all have further to go. 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 then 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 progress aligning.
3	The company is active and taking clear action to align.
4	The company is reactive and shows embryonic/limited action to align.
5	The company is not aligned and inactive.

STEP alignment level definitions

Escalation approach

We hope to maintain an 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 these circumstances, we are prepared to escalate specific areas of concern to effect 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 ultimately be determined by the extent and pace to which companies demonstrate meaningful progress over time. Where escalation has been unsuccessful in delivering the changes requested and we do not feel confident that the company intends to address our concerns, we are committed to divest to drive the necessary change.

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 Review²³, available on our website. Note that the escalation pathway for each company will be decided on a case-by-case basis.

²³Aviva Investors policies and documents

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

Evaluation results

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

Click to interact with charts

Human rights due diligence ask

Living wages ask

Engagement progress in 2022

During 2022, we engaged with all companies in the portfolio, holding one-to-one meetings with 74% of holdings, with 75 substantive engagements carried out.²⁴

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

Phase 1 of STEP launched in March 2022, when letters were sent to all board chairs setting out our expectations. As December 31, 2022, 90 per cent of holdings had responded to the letter and the team had undertaken 75 substantive engagements across the focus group – spanning bespoke letters to one-onto-one meetings with company representatives, such as members of the board, senior executives or managers of specialist areas.

In 2022 during the first year of the programme, we did not observe any substantive progress on our specific asks. Nevertheless, companies have generally been receptive to our challenges to go further and acknowledged the social and business imperative to do so. This is particularly true for those operating in countries where there have been high-profile public debates about widening gaps between different income groups and systemic social injustices. Generally, companies do not consider themselves detached from these discussions, and acknowledge the role they do, and must, play in wider society.

²⁴Substantive engagements refer to engagements where we have set a specific and tailored engagement objective relating to change we are looking to see, and the engagement involves in-depth dialogue on the matter.

Most companies have highlighted the importance of people to value creation – particularly with respect to how the company is perceived by business partners, current and future employees and customers. This may reflect a wider cultural shift in the business and investor community about the financial materiality of people to the long-term health and sustainability of business.

There was heightened awareness of changing human rights expectations in European companies compared with other regions, largely catalysed by emerging regulation. Encouragingly, there is growing awareness and interest from companies in the US as companies recognise the need to keep pace with peers, as well as greater understanding among some emerging market companies where regulation is also beginning to take effect.

There is also growing traction on the living wage concept, particularly with non-European companies. We hope momentum continues to build, particularly with of a launch of a living wage initiative in the US and a global living wage network in the coming year.

Overview of corporate progress against each STEP request for change

% breakdown -
progress against
HRDD ask

% breakdown:
Progress against
living wages ask

Key challenges

There is clear scope for improvement across the focus group. We have outlined key challenges observed during the first year of engagement, and have factored these insights into our ongoing assessments of companies' performance and sustainable growth projections.

In general, there is still a poor understanding of the corporate responsibility to respect human rights as articulated in the UNGPs; too many companies are unfamiliar with their responsibilities, what due diligence entails and how human rights are relevant for all parts of the business. A handful of companies do not consider human rights to be a material topic for their company and/or consider their current approach sufficient for their level of risk; some appear to be interpreting the requirements of recently introduced or forthcoming regulation too narrowly, which could increase the risk of divergent and confused approaches. As a result, many of our initial engagements focused on improving companies’ understanding of their responsibilities, rather than on substantive issues in value chains.

Progress against the two core asks is likely to depend on the ability of engaged company representatives to convince colleagues (across multiple layers of management) about the benefits of introducing practices such as human rights due diligence or implementing a living wage, benefits which are likely to materialise incrementally and over a longer time horizon. It will be important to supply engaged individuals with evidence, resources and support to make the case, particularly as they face growing demands on other sustainability issues.

Economic uncertainty and rising costs have magnified the conflict that appears to exist between commercial objectives and guaranteeing a decent, liveable wage. Many companies claimed to have understood the concept of a living wage and the importance of compensation covering the costs of living for their employees. However, few were proactively benchmarking the wages they provide against living wage standards; even fewer had factored in their contractor or supply chain workforce.

Finally, whilst we recognise some companies are making progress and demonstrating ‘leadership’ against our asks, it is also true these same companies often continue to be linked with human rights-related allegations or controversies. This suggests that strengthening approaches to managing human rights risks and impacts is likely to uncover more of the ‘bad’ practice hidden from plain view, and certain businesses with complex, often opaque, international structures are inherently more prone to causing harm to people than others. The latter is a flaw of company business models; the former can be a tool to help reform them.

Company case studies

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Company	Case study
Trane Technologies	Trane Technologies is owned in the portfolio as a solutions company – it was receptive to our requests and showed an interest in aligning with international standards and willingness to disclose additional information on its human rights due diligence process in future. The company was one of few US companies that indicated an openness to developing its approach as expectations grow. We maintained our position in the company with the intention to re-evaluate this when the company releases new reporting in 2023.
Novartis	Novartis is owned in the portfolio as a solutions company – owing to its progress to increase access to vital medicines, including by implementing a global access fund for all new medicines, setting targets to increase patient access to treatments in low-middle income countries and increased investment in R&D for underserved tropical diseases. In addition, the company has developed a strong approach to managing human rights risks and impacts, including developing a measurement framework to track performance across three pillars: human rights due diligence, empowerment and external engagement. The company also discloses data for its 12 human rights focus areas by risks and impacts in specific functions and departments, providing much needed granularity to help external stakeholders track progress. We are also encouraged by the company’s commitment to the living wage and intention to expand this to its supplier base. The engagement strengthened our investment conviction in holding the company.
NXP Semiconductor	NXP Semiconductor is owned in the portfolio as a transition company – it is one of the leading global manufacturers of semiconductor equipment used in a range of markets, from consumer electronics to industrial and auto manufacturing. Managing social risks within its supply chain is critical to maintaining a steady and reliable supply of products to service growing demand. The company has disclosed the results of its human rights impact assessment and identified salient issues, provides strategies for managing these risks and has reported on instances of remediation. We encouraged the company to disclose the outcomes of its mitigation efforts and progress its disclosures on living wages.
SSE	SSE is owned in the portfolio as a transition company – it is the leading generator of renewable electricity and one of the largest electricity network companies in the UK. SEE will play a key role in the UK’s energy transition and delivering the UK government’s net-zero objectives. SSE have fully embraced the concept that the energy transition needs to be inclusive and fair to be successful. To that extent, our engagement with the company focused on measuring progress against its just transition framework (SSE was the first utility to publish a just transition fund), which it will report against the following year. The company also has a well-established commitment to living wages and recently became a Living Hours employer. As a result of our meeting, we added to our holding due to increased confidence in company to deliver more sustainable returns from long-term projects, which should be beneficial to the investment case.
Visa	Visa is owned in the portfolio as a transitions company - public disclosures are promising given the company aligns itself with the UNGPs and outlines the human rights risks and impacts associated with its four key stakeholder groups. Despite this, we were disappointed with its approach to mitigate human rights risks facing consumers using its services. We were not reassured the company had applied the lessons from previous incidents and was taking proactive measures to stop the sale of harmful products (such as ghost guns in the USA). Our conviction in our core investment thesis remains, as evidenced by robust payment volumes (as the non-discretionary element of consumer spending has been relatively resilient and the company continues to benefit from the ongoing recovery in cross-border travel). However, we decided to reduce our holding based on our engagement with the company.

Priorities ahead

In 2023, we will continue to use this programme as part of our broader active ownership work to drive companies to transition towards a more socially equitable society.

We will continue to increase pressure on the STEP focus group, particularly those falling in scope of upcoming regulation on mandatory human rights due diligence, to close gaps in existing approaches. It is our ambition to transcend from discussions about human rights due diligence processes and human rights impact assessments to discussions about individual salient issues and the effectiveness of companies’ actions, although this may not be possible in all markets. We also expect companies to be more transparent about their practices regarding living wages and dialogue with stakeholders such as unions and communities.

As noted, we have an escalation pathway that could lead to divestment if insufficient progress is observed against the engagement asks of the programme. We do acknowledge, however, the challenges of implementing these asks and will evaluate companies on their progress over time, recognising strategic changes will take time to be implemented into a company’s processes. As 2022 was the first year of STEP, no action was taken by way of escalation against companies, 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