How Aegon UK produced one of the UK pension sector’s first roadmaps to net-zero

Last month, Aegon UK became one of the first large British financial services firms to publish a detailed pathway to net-zero financed emissions. The company’s ‘Climate Roadmap’ outlines how it will end investments in high-carbon activities through its £200bn portfolio in the years to come.

It is something of a net-zero transition plan – a document including not only long-term and interim emissions goals, but concrete steps achieving them. It also takes into account the risks of inaction and the opportunities of investing in low-carbon projects and, indeed, a low-carbon society.

Aegon UK’s head of responsible investment Hilkka Komulainen tells edie that the publication of the Roadmap was the culmination of two years’ of targeted work, plus a longer history of general considerations of climate as a part of good financial stewardship practices.

She says: “Most of our customers will be investing for decades… [climate] cannot be something that is outsourced to fund managers externally,” noting that the business has a few dozen managers.

“It is more and more the case that we, as a provider, have direct contact with our beneficiaries on sustainability and climate topics. People look to us to steward their pension savings.”

So, being a major pensions provider means that Aegon UK is not facing the push and pull between short-term financial returns and long-term, broader sustainability that many businesses grapple with.

Aegon UK announced a commitment to achieve net-zero financed emissions from its pension funds by 2050 almost three years ago. This comes with an interim aim to halve financed emissions by 2030.

For Komulainen, producing the Climate Roadmap was the natural next step. She joined the business around two years ago and her team has expanded quickly, enabling the development of the Roadmap – and laying the foundation for its delivery.

The timing of the Roadmap’s publication is also tied, she explains, to the growing levels of regulation around ESG facing the financial services sector in the UK and EU.

“There is a certain amount of work that all providers are grappling with to meet new regulatory requirements,” Komulainen summarises.

A key change in the EU was the introduction of the Corporate Sustainability Reporting Directive (CSRD) last year. The Directive increases disclosure requirements on indirect emissions, waste and other environmental topics, with early analysis revealing that the majority of firms set to be affected are not yet prepared for the climate components. The CSRD will be compounded by the European Sustainability Reporting Standards (ESRS) from next year, further broadening the number of organisations legally required to disclose better climate data.

Meanwhile, in the UK, the Government is yet to set a firm date for mandatory climate transition plans. It will also need to clarify whether the mandate covers the financial sector. Details on what a good plan have already been outlined, with a handful of proactive organisations using them to draft their first iteration.

Most of these early movers are not financial firms, though. And the vast majority are yet to fully align with the ‘gold standard’ recommendations.

Komulainen notes that Aegon UK sees scenario analysis as key part of the ‘gold standard’. The process, popularized by the Taskforce on Climate-related Disclosures (TCFD), involves assessing risks and opportunities to a business’s operations and value chains in a range of global heating scenarios.

Divestment, engagement and impact

Something that few financial firms disclose, at present, is how they engage with companies in their portfolios on climate-related issues (Scottish Widows is something of an outlier in that regard). This can raise concerns regarding potential greenwashing for those firms deciding to opt for engagement before divestment; how can stakeholders assess whether engagement is meaningful, or being used to cover for greenwashing, with no impactful changes happening behind the scenes?

Aegon UK is, indeed, aiming to engage before divesting. It may well update its exclusion criteria in the near future after developing sector-specific emissions goals for 2030 and beyond for high-emission sectors; these are in the works for power and utilities and agriculture, among other industries.

In the meantime, the Climate Roadmap explains the reasonings for this approach. It also explains the engagement process and contains an update on how Aegon UK will report publicly on the outcomes of its engagement work. This will cover not only investee companies’ own emissions and climate pledges, but their broader influence, including whether they are helping or hindering green policy progress.

Komulainen summarises: “We think that, being a large financial services player, one of the most important things we can do is engage and influence.”

“Given that we are so broadly exposed, we’re looking at how we manage systemic risk and how we address decarbonisation at a broader level…. We’ve included climate-related policy and regulation as a specific lever.”

Aegon UK has more than 15,000 companies in its portfolio. It has already applied a “tilt” towards lower-carbon firms and firms with good ESG performance to its £16bn default fund portfolio for workplace pensions, which does not “wash [the company’s] hands” of involvement with high-carbon sectors, but does “set incentives and send a clear message”.

The “tilt” has been in place for less than two years and has already resulted in a 23% reduction in emissions intensity. Building on this progress, Aegon UK is investing £3bn of its workplace default fund in new ESG equity index funds from BlackRock.

While Aegon UK has not yet updated divestment commitments relating to climate, it has set a new target to invest for impact. It is aiming to invest £500m in climate solutions globally between 2023 and 2026.

So, what constitutes a ‘climate solution’?

“We’ve given ourselves quite a broad definition,” Komulainen explains. Essentially, a solution is any project “explicitly trying to address climate mitigation or adaptation, or both”.

Projects that fall in to this category include renewable energy generation, transport electrification, coastal protection and low-impact agriculture. There will be a focus on more local projects in the first instance due to both visibility benefits, and the growing green economy in Europe.

As time goes on, Komulainen would like to see more global investments. She is also keen for the business to add nature-based solutions to its menu of investable climate solutions more formally.

This is partly because nature-based solutions are set to come into their own as a rapidly-growing asset class in the near future.

There are, once again, reporting requirements to consider.  Komulainen explains that she wants to see the business approaching nature and climate strategizing and disclosures in a more interconnected way, and the launch of the Task Force on Nature-Related Financial Disclosures’ (TNFD) framework will assist with this process. A final framework is due out this September and will be modelled on the TNFD.

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