DC Default Sustainability Monitor 2023

The research - conducted during May and June 2023 - also looked at how the providers were planning to evolve this fund's investment strategy and approach to sustainability over the coming 12 months.

Should you have any queries about the below, please contact Martin Richmond at [email protected].

Aegon Master Trust

What is the official name of your main default fund for growth phase members?

Aegon BlackRock LifePath Flexi (Early Days) target dated funds. When members are furthest from retirement the growth phase is positioned as an "early days" fund, which is a catch all for those funds with 100% equity/equity like investments.

What is the size of this fund (AUM) in £?

£3.6bn as at 31 December 2022 (this covers the full range of funds in LifePath Flexi).

Describe the investment strategy of this fund

When members are at the early stage of their career, LifePath focusses on delivering growth, investing in equities (company shares) and equity like investments. Equities have historically provided greater long-term growth potential than lower risk asset classes, like fixed income securities (government and corporate bonds) or cash.

LifePath uses passive building blocks and invests global equity markets, including emerging markets. The product is designed to be a long-term savings vehicle, and each quarter BlackRock, the underlying asset manager, recalibrate their capital market assumptions to ensure the portfolios are optimally positioned to achieve their long-term goals. The team also conducts research in an ongoing basis and implement these ideas if they are deemed to be a material benefit to members; whether that be evolving the building blocks to integrate ESG or evolving the approach to managing currency risk. LifePath is a range of target dated funds, making the members savings journey extremely easy to understand as it's at the underlying fund where we evolve the asset allocation to be appropriate for their age/time horizons - offering a one fund solution to and through retirement.

We're focussed on managing ESG risks within the default, which is why LifePath has evolved to have around 92% invested in strategies that incorporate ESG screens, aiming to grow members savings responsibly.

Describe the sustainability (ESG) approach of this fund?

LifePath uses passive funds as the underlying building blocks and we have worked closely with BlackRock to move assets in the LifePath default strategies into funds incorporating ESG screens. As of December 2022, 92% of assets in the early years and 45% in the retirement stage fund have been moved into funds incorporating ESG screens. An average of 71% of assets across all LifePath target-dated versions are managed to ESG mandates.

We plan to increase these levels over the coming months and years, and in line with the LifePath climate objective that states the funds will aim to target an absolute reduction of 50% in carbon emissions intensity by sales, over the 10-year period between June 2019 to June 2029. This aligns with our commitment, made in 2019, to reach net zero by 2050 and to halve emissions by 2030 for our default funds.

Capital allocation is one lever in our approach to sustainability, but we also believe active ownership to be a fundamental pillar in managing risks on behalf of our members and also supporting a broader societal progress.

How are you planning to evolve this fund's investment strategy and approach to sustainability over the coming 12 months?

We recently published our climate roadmap which covers our whole default investment estate. It outlines short-term targets and actions to support our 2050 net zero goal and 2030 50% emissions reduction target.

For LifePath, it will continue to increase exposure to ESG screened and optimised indices where possible and as data coverage and quality expands, these will inform future investment developments. In 2023, emerging markets equity will also incorporate screens based on ESG factors, this change will see the growth phase of LifePath Flexi 100% invested in building blocks that screen and/or optimise.

Since LifePath has the 50% reduction target included within the fund prospectus, monitoring and understanding the progress against this target will be key for the next 12 months to ensure the portfolios are optimally positioned to deliver meet both their financial and sustainable objectives.

Aviva Master Trust

What is the official name of your main default fund for growth phase members?

My Future Focus Growth

What is the size of this fund (AUM) in £?

£15.8bn as at end May 2023.

Describe the investment strategy of this fund

My Future Focus Growth is a genuinely globally diversified fund, while also being risk aware, thanks to a volatility target to prevent the solution from taking excessive amounts of risk, while at the same time helping members to build a savings pot for retirement ahead of inflation.

As the engine of the My Future Focus solution, the aim of My Future Focus Growth is to achieve long-term capital growth. The fund does this by mainly investing in traditional and alternative growth assets - including UK and overseas (including emerging market) equities and high yield bonds and emerging market debt. The remainder of the fund is invested in UK and global investment grade debt to cushion falls in equity markets. There's also an allocation to UK commercial property, and therefore illiquid assets, alongside the traditional spectrum of equities and bonds, to provide further diversification.

Active components are used in less traditional areas, such as emerging market bonds, high yield debt and property, where we believe active asset allocation can help improve returns and manage risk. Passive components are used in traditional assets, such as equities, where markets tend to be relatively efficient.

We look at the My Future Focus strategy annually from a strategic asset allocation perspective to ensure the solution can meet its long-term objectives. The default strategy also benefits from tactical asset allocation where the fund manager, Aviva Investors, regularly assesses the market environment, and then makes small changes to the asset allocation to respond to and to exploit short-term investment opportunities.

My Future Focus Growth has been designed to go beyond the traditional default model, enabling our customers to benefit from short-term opportunities in markets, while at the same time growing their savings over the long term in a risk-aware manner.

Describe the sustainability (ESG) approach of this fund?

Dedicated inhouse ESG research and support, an optimisation process to tilt the index funds to higher scoring ESG companies, ongoing engagement with companies and exclusions are the key features of the fund's ESG approach.

A team of more than 30 responsible investment analysts provide research into ESG matters for the investment team, helping to shape investment decisions, as well as the team's voting and engagement activities.

Each analyst is a subject-matter expert in their field, from plastic pollution and the circular economy to human and labour rights. The team 's pedigree is further enhanced by their thought-leadership, as well as their work with charities and NGOs.

The research from the ESG team helps the investment managers to keep abreast of the latest ESG developments, such as from a regulatory or science-based target perspective, what this means for the companies and industries in the fund, and their ability to create long-term value. The research also feeds into Aviva Investors' proprietary ESG data models, where internal and external data provides quantitative assessments of ESG risks at both a company and portfolio level. The research is used to give each company an ESG score.

The qualitative and quantitative data feeds directly into the management of the actively managed underlying funds, while the regional equity funds are optimised to have a higher ESG score than their respective benchmarks. This is combined with a carbon intensity reduction pathway that targets the annual reduction in carbon intensity required to meet Aviva's net zero ambitions.

Finally, exclusions align the fund with our net zero target and our overall approach to responsible investment. The fund does not invest in companies and sectors that generate prescribed levels of revenue from: controversial weapons and civilian firearms; unconventional fossil fuels; tobacco producers and distributors; thermal coal unless firms have signed up to science-based targets initiatives. UN Global Compact violators are not held in the fund.

How are you planning to evolve this fund's investment strategy and approach to sustainability over the coming 12 months?

We will continue to build on our track record in responsible investment and dedicated resources in this area to further integrate responsible investment across My Future Focus Growth. We are currently looking at how best to incorporate impact and thematic strategies across the solution to further strengthen ESG content.

We are also currently looking to enhance the diversification of our illiquid allocation by introducing asset classes such as private debt, to enable members to further access the illiquidity premium offered by this type of asset. We will also look to integrate ESG factors across the new asset class allocation.

As part of our annual review, we are reviewing whether the level of risk being targeted by those members further from their retirement date remains appropriate, and whether members would benefit from taking more risk earlier in their retirement investment journey.

The Cushon Master Trust

What is the official name of your main default fund for growth phase members?

The official name of our main default fund for growth phase members is the Cushon Sustainable Investment Strategy.

What is the size of this fund (AUM) in £?

As of 31 December 2022, the size of this fund totalled £383m in assets under management.

Describe the investment strategy of this fund.

The Cushon Sustainable Investment Strategy is designed to generate the competitive long term returns that good member outcomes depend on. It allocates a relatively high proportion to return seeking assets and holds these for longer than many alternative strategies. It also reflects strong beliefs in what added value private market assets can bring and the importance of effective long term climate risk mitigation. It's explicitly designed to create opportunities for app-based member engagement and deliver positive real-world change.

The strategy is comprised of three building blocks. The first of which is equity, which makes up 75% of the fund. This includes a bespoke globally diversified sustainable equity index with zero tracking error, zero investment cost, zero transaction costs and market leading sustainability metrics.

The second is in bonds, which make up 10% of the fund. This includes a fixed income portfolio investing across the global credit space to drive decarbonisation of high-emitting sectors and deliver positive social and climate impact.

The third is in private markets, which make up 15% of the fund. This includes a diversified private multi-asset impact portfolio targeting investing in private equity, sustainable infrastructure, real estate, and natural capital across four impact themes: social equity and inclusion; carbon capture; adaptation; and mitigation.

Describe the sustainability (ESG) approach of this fund?

The strategy takes a bottom-up approach when incorporating sustainability in each of the underlying funds. Climate risk is viewed as both a material risk and a material opportunity - in terms of green investments - and a central theme shared across the underlying funds is rapid decarbonisation.

The strategy has already achieved emission reductions of more than 60% compared to the 2022 baseline.

Our strategy is designed to align with and contribute to the UN SDGs, increase green revenues supporting the climate transition, generate social impact, and management of physical and transition risks.

Despite the significant emission reductions, the strategy supports the transition to net zero of "hard-to-abate" industries such as agriculture, cement, steel, chemicals, energy, materials, construction, and transport, for example by investing in a cement producer with a credible transition plan and a low carbon approach to cement production.

How are you planning to evolve this fund's investment strategy and approach to sustainability over the coming 12 months?

We intend to improve diversification, protect against inflation and reduce climate transition risks by increasing our allocation to natural capital, ensuring significant negative emissions and a positive impact on biodiversity.

Fidelity Master Trust

What is the official name of your main default fund for growth phase members?

FutureWise Target Date Funds

What is the size of this fund (AUM) in £?

£5.8bn in FutureWise as at 31 December 2022. Please note this is used across several other products, not just the master trust.

Describe the investment strategy of this fund

FutureWise is structured as target date funds (TDFs). TDFs provide both fee transparency and the flexibility needed for ongoing developments in an ever-changing environment.

FutureWise has been built with four principles in mind:

1. Asset Allocation - The strategic Asset Allocation (SAA) will be responsible for the majority of investment returns.
2. Active Portfolio Management - There may be times when the portfolio managers identify opportunities within markets and tilt the portfolio via Tactical Asset allocation (TAA). This is put in use in the de-risking and post-retirement phase.
3. Value - High costs erode capital return over time. Therefore, the portfolio utilises funds which provide the greatest value for money to our members.
4. Sustainability - FutureWise has sustainability running through its DNA.

The growth phase is exclusively invested in global equities to maximise returns.

Describe the sustainability (ESG) approach of this fund?

Core to FutureWise's proposition is the integration of sustainability and ESG considerations. Each TDF is labelled as a sustainable fund, which will therefore by definition, ensure all underlying funds and holdings also meet these strict criteria (to meet the TDF objectives). There are three levers which are consistently applied across holdings:

FutureWise has a clear focus on carbon targets with the objective of reducing portfolio carbon emissions year-on-year for both equities and fixed income components. We have committed to ensuring that FutureWise reaches the target of halving its carbon footprint by 2030 (from a challenging 2020 baseline) with the ultimate intention of being net zero by 2050. Overtime, FutureWise's green revenues will also increase and become a greater factor in its sustainable credentials. Progress is tracked in our TCFD report, the first of which is published on our website.

In addition, FutureWise looks to tilt the portfolio towards companies deemed to either be leaders or improvers in ESG, whilst reducing exposure to laggards. In addition to third-party ESG ratings (e.g. MSCI, Sustainalytics), we can leverage the vast engagement and research analysis we have available on an ongoing basis. For example, a significant advantage is applying this analysis for forward-looking ratings which cannot be offered through third-party ratings.

Furthermore, we have brought in a number of exclusions into sectors/industries which deemed to negatively impact the climate transition, contradict sustainability objectives or a combination of both. The exclusions include:

• Controversial weapons (including nuclear weapons)
• Semi-automatic weapons
• Thermal coal
• Oil Sands
• Tobacco
• UN Global Compact Violators
• Country Russia and Belarus securities

How are you planning to evolve this fund's investment strategy and approach to sustainability over the coming 12 months?

As part of our ongoing evolution of the investment strategy, we are now exploring the feasibility of using a wider range of asset classes, including illiquid investments, that can help improve member outcomes. Illiquid assets, such as private equity, real estate, and infrastructure, can offer attractive risk-adjusted returns, as well as diversification benefits. By broadening our investment universe, we aim to enhance the risk-return profile of our portfolios while maintaining our commitment to sustainability.

Integral to our expanded investment approach is the assurance that any new investments will align with our sustainability journey and the broader commitments made by our default investment options. This means carefully evaluating the environmental, social, and governance (ESG) factors of potential investments and selecting those that contribute positively to our sustainability objectives. In conclusion, our ongoing evolution of the fund's investment strategy and approach to sustainability reflects our dedication to delivering strong financial performance for our members while contributing to a more sustainable future.

Legal & General

What is the official name of your main default fund for growth phase members?

L&G Target Date Funds.

What is the size of this fund (AUM) in £?

£10.6bn in AUM, as of 31 December 2022.

Describe the investment strategy of this fund

The L&G Target Date Funds strategy is designed and managed by an expert fund management team that employ a thorough and robust investment process. This includes taking into account detailed quantitative analysis coupled with qualitative inputs, such as examining the behaviours of over 4.9m members, to ensure that the strategy delivers the best possible chance of individuals achieving consistently good outcomes. 

The team leverage the global expertise of Legal & General Investment Management (LGIM) to build a glidepath which begins with the majority invested in growth assets diversified across different asset classes, including equities and alternatives such as private equity, commodities, infrastructure and global green real estate, to provide access to greater opportunities for growth. 

As retirement approaches, the strategy benefits from greater diversification to provide members with further risk management and opportunities for growth - such as an allocation to illiquid assets in the form of short-dated private credit. A key part of our risk management philosophy is that risk does not boil down to a single volatility number. It includes an assessment of investment-related factors (e.g., market risk) and also non-investment factors (e.g. behavioural and longevity risk). Generational intelligence results in tailored glidepaths for the earlier TDF cohorts depending on how we expect members to behave in retirement.

As a to-and-through solution, in retirement, the strategy aims to match the typical path of an individual as they access their benefits and continues to manage risk until individuals engage in a way more aligned to their personal circumstances.

Describe the sustainability (ESG) approach of this fund?

It's critical that we deliver good outcomes for members in a responsible and sustainable way and therefore sustainability is at the heart of everything we do at LGIM. We are pioneering the way for ESG approaches and have been recognised with the highest ratings by externals organisations such as the UNPRI or the consumer group ShareAction.

The L&G TDFs fully integrate ESG considerations throughout the entire strategy. First, we exclude the worst offending companies globally (e.g. manufacturers of controversial weapons, companies that derive more than 20% of their revenue from coal mining or oil sands, companies that violate the UNGC). We then score companies on environmental, social, governance and transparency factors, with the fund allocating more money to those who score better and less to the ones that don't. This includes scoring on biodiversity, deforestation, ethnicity on boards and pay policy.

The Funds also have a decarbonisation pathway towards Net Zero by 2050 or sooner, with clear interim targets. They invest in positive impact investments, such as sustainable bonds focused on childhood vaccination, support for refugees and gender equality, as well as funding for companies that operate sustainably (e.g. social housing, homeless shelters and renewable energy).

Our Stewardship Team are recognised within the industry for taking a leading role on engagement and voting. We leverage our scale to influence companies and bring about change as well as taking a lead role in industry-wide initiatives. We have achieved the highest 5* rating from the UN's Principles for Responsible Investment and we are one of only five managers to receive the A rating by consumer organisation ShareAction. 

Our innovate Climate Impact Pledge is our dedicated climate engagement program which is designed to identify the worst offending companies from a climate perspective and to engage with them to bring about change. For companies that do not meet our minimum standards and that do not engage, there are consequences, including voting sanctions, exclusions and publicly naming them.  

How are you planning to evolve this fund's investment strategy and approach to sustainability over the coming 12 months?

Our Target Date Funds are not a ‘set and forget' strategy with only triennial review - they are designed to evolve with changing DC behaviour, investment and market developments and changes to the tax and regulatory landscape, with at least one full review each year. We're actively considering further allocation to illiquid assets, with the objective of further improving member outcomes as well as managing risk through additional diversification benefits to members.

We will continue to build on our strong track record in responsible investment by continuing to support our net zero goals. In addition, LGIM is constantly evolving its investment range and further integrating ESG considerations on multiple levels, from introducing new funds to evolving existing methodologies and incorporating new tools. For example, LGIM has developed new ESG-related products in the past year including products that consider impact investing and investing with an approach that is consistent with the UN Sustainable Development Goals. All of these aspects will be considered within the TDF strategy.

Finally, we are incorporating the latest demographics and retirement trends from our 2022 Annual Retirement Study and assessing the impact on the TDF's Approaching Retirement Stage.

LifeSight

What is the official name of your main default fund for growth phase members?

Medium Risk Drawdown. LifeSight also has a range of other default strategies.

What is the size of this fund (AUM) in £?

£5.1bn as at 31 December 2022. The AUM of LifeSight as a whole was £11.8bn.

£5.4bn as at 31 March 2023. The AUM of LifeSight as a whole was £12.9bn.

Describe the investment strategy of this fund

The Medium Risk Drawdown Default is a lifecycle strategy using three underlying building block funds: LifeSight Equity, LifeSight Diversified Growth Fund (DGF) and LifeSight Cash.

The primary growth phase of the strategy is invested 100% in LifeSight Equity until 25 years from retirement, before gradually de-risking into 100% LifeSight DGF at five years from retirement. An allocation to cash is then gradually introduced (to reduce volatility as members approach retirement and to increase the flexibility for members' post-retirement investment choices) towards an at-retirement allocation of 70% LifeSight DGF and 30% LifeSight Cash.

The two key growth building block funds, LifeSight Equity and LifeSight DGF, which represent the majority of the assets, are fiduciary managed by WTW, drawing on the intellectual capital of both WTW and underlying external managers in the ongoing dynamic portfolio construction.

The strategy is intentionally built to have a higher level of risk and return for younger members, which reduces over time as members move through the lifecycle. We believe that there is an opportunity cost of de-risking too much or too early and our approach seeks to maximise long-term member outcomes subject to an appropriate level of risk throughout the member journey.

Describe the sustainability (ESG) approach of this fund?

In summary LifeSight:

• Aims to integrate best-in-class sustainable and responsible investment within our investment offering.
• Is committed to use our scale and position as a leading Master Trust to contribute to creating a sustainable future for society and the planet.
• Focuses on the direct financially material outcomes for members, with due regard to the real-world impacts of the investment approach where these affect risk and return.
• Has established sustainable and responsible investment beliefs and policies that underpin these aims as set out in our SIP.

Our stewardship activities are achieved primarily through the activities of WTW; underlying investment managers; and a specialist engagement overlay provider. As a responsible and active asset owner, we have a general preference for stewardship over exclusion or divestment; however, we recognise that this may be merited in certain circumstances.

At an underlying fund level, LifeSight Equity and DGF explicitly embed sustainable investing and ESG criteria across 100% of each fund by tilting the asset allocation and using exclusions. Subject to certain thresholds our targeted exclusions approach currently focus on companies involved in the production of controversial weapons, thermal coal, and persistent UNGC violators.

Specifically regarding climate change:

• LifeSight has set a net zero greenhouse gas emissions target across our default / lifecycle strategies, which includes Medium Risk Drawdown, by 2050 at the latest, with at least 50% reduction by 2030.
• We have developed a detailed carbon journey plan (CJP) to achieve this net zero target and monitor progress over time relative to this CJP.
• We have also developed a cimate dashboard, which tracks progress against a range of key climate metrics. This is set out in detail in our latest TCFD Statement.
• We have made a range of investments underlying LifeSight Equity and LifeSight DGF that are consistent with this trajectory (further details below).

How are you planning to evolve this fund's investment strategy and approach to sustainability over the coming 12 months?

Within the building block funds we continuously research and consider new ideas for the funds which could be beneficial to our current offering within the lifecycle strategies.

Our latest innovation was the climate transition index (CTI), which was created by WTW, to help investors manage climate-related transition risk. CTI invests more in companies likely to perform well in a climate transition and reduces exposure to those likely to be negatively impacted. The approach is forward-looking, so helps on the future pathway to net zero rather than simply at a single point in time. In Q1 2023 the fiduciary manager increased the allocation to CTI within LifeSight Equity. We are looking to expand the application of this climate transition risk management approach.

We continue to evolve our climate scorecard to report our progress against our carbon journey plan and a range of sustainability metrics as we believe that as an evolving area no single metric tells the complete story. We have led the industry by voluntarily reporting versus the TCFD framework for three years prior to this becoming mandatory. We will continue to report publicly via this method in line with new regulatory requirements.

More generally, we continue to engage with underlying managers and search for innovative solutions to further improve our ESG integration and achieve our net zero target.

Nest

What is the official name of your main default fund for growth phase members?

Our default funds are named Nest Retirement Date funds.

What is the size of this fund (AUM) in £?

As at December 2022, Nest's total assets under management stood at £26.8bn. However, in May, we reached the £30bn milestone.

Describe the investment strategy of this fund 

Nest's flagship default strategy provides a fund for each year in which we expect a member could retire. We manage members' assets according to their age and how markets are performing. If members join in their early twenties, they'll go through four, dynamically managed investment phases: the foundation phase (approx. 5 years), the growth phase (approx. 30 years), the consolidation phase (approx. 10 years) and the post-retirement phase. The over-arching objective of Nest's target date default fund strategy is to provide all our members with the best risk-adjusted returns possible, whilst supporting long-term wealth creation. The strategy seeks returns in excess of CPI +3% per annum after charges during the growth phase, then de-risks the funds as they approach their retirement year.

Our funds are truly diversified, with investments in a broad range of global markets. We continually evolve and improve the sophistication of our award-winning default fund strategy, including increasing the proportion of our assets that are invested in private market and illiquid assets. Nest's scale and expertise enables us to include these assets in our portfolio at attractive prices, something previously only available to UK pension savers in large defined benefit schemes.

Describe the sustainability (ESG) approach of this fund?

All Nest's funds and mandates have ESG principles at their core. In addressing our ESG priorities and delivering on our responsible investment objectives, we take action in five core areas: asset allocation, manager selection, active ownership, risk monitoring and advocacy (engagement with policymakers and standard setters). Using our prioritisation framework, research and analysis, we have identified six priority areas that guide our current ESG work: climate change, human capital, cyber security, digital rights, diversity and food.

Our flagship fund has an ESG tilt when investing in equities, but we look for opportunities where we can to address ESG risks and opportunities across the asset allocation. We've implemented an exclusion of companies that derive more than 20% of their revenues from thermal coal (production or power generation), oil sands, and arctic exploration of oil and gas across all our investments. We've also updated our policy to reflect that we will not invest in companies developing new thermal coal or oil sands projects. The thresholds will be tightened to 10% by the end of 2023, and by 2025 we'll exclude all remaining companies unless they have committed to a full, accountable phase-out by 2030.

How are you planning to evolve this fund's investment strategy and approach to sustainability over the coming 12 months?

Our award-winning investment strategy is continually evolving. We're currently considering plans to incorporate illiquid assets earlier into the saving's profile of our members. This change should help to maximise members long-term returns, allowing our members to benefit from the reliable returns these types of assets can typically offer over decades. Sustainable investment is at the heart of everything we do, it's the foundation on which our investment strategy is built. This year, we are releasing the latest edition of our responsible investing report, which outlines all of our achievements and activity from 2022/2023.

We are also planning on building out our approach in several new priority areas including big tech and natural capital. There are a broad range of natural capital assets and risks to consider, including deforestation. We joined Global Canopy's deforestation free pension fund group to develop guidance for pension funds to become deforestation free.

Now: Pensions

What is the official name of your main default fund for growth phase members?

Diversified Growth Fund (DGF).

What is the size of this fund (AUM) in £?

£2.91bn (DGF only as at 31 December 2022).

Describe the investment strategy of this fund

We focus on three core objectives: return, risk, responsible investment:

• To deliver a return in excess of inflation (CPI) of 4% a year (CPI +4% a year) or more over the long-term, net of the annual investment charge.
• The expected risk, measured in terms of annual volatility, is 12.5% a year (expected range: from 10% to 15%).
• At least half of the portfolio's net asset value in investments which support the trustee's responsible investment beliefs, and net zero carbon emissions by 2050, consistent with the Paris Climate Agreement.

The DGF allocates investments between five investment groups, consisting of different asset classes, each of which has different risk and return characteristics. The balance across the asset classes is at the investment manager's discretion, subject to agreed guidelines.

The investment manager bases its decisions on its long-term risk and return assessment of different asset classes, anticipated levels of diversification, impact of changing economic conditions, responsible investment (RI) factors and its assessment of an investment's alignment with RI objectives.

The investment groups, likely asset classes to be held:

• Equity: including developed market equity, emerging market equity and private equity
• Interest: Assets which pay cashflows to investors and whose value is primarily affected by changes in interest rates including government bonds, sustainable bonds and interest rate swaps.
• Inflation: Assets whose value is linked to inflation, including inflation bonds (government and non-government), inflation swaps and commodities (excluding fossil fuels).
• Income: Assets that pay regular income including investment-grade credit, high-yield credit, emerging market debt and illiquid investments.
• Other: Assets that are different to the other investment groups such as foreign exchange and gold.

A combination of physical and derivative investments will be used.

Further details can be found in the statement of investment principles (SIP).

Describe the sustainability (ESG) approach of this fund?

We consider return, risk and real-world impact when setting investment objectives. As such, we've committed our investment portfolios to net zero greenhouse gas emissions by 2050, with a 50% emissions reduction target by 2030, based on 2019 levels. This informs our investment decisions.

To help meet our net zero commitment, we've set a minimum target of 50% of investments with an explicit sustainability or ESG objective - for example, a green bond or a low carbon equity investment.

We've invested in green bonds since 2017. Our green bonds, including the UK government's green gilt, finance a range of sustainability activities, such as low carbon energy and transport. Last year we also broadened this to include sustainable bonds and ESG based equity and cash funds.

We've also:

• Invested in low carbon equity. The portfolio excludes the most unsustainable companies and increases our investments in more sustainable companies.
• In 2021 we ended our direct commodity exposure to oil and gas replacing with base metals, which are used as part of the low carbon transition.
• Increased our allocations to environmentally aware cash.

We believe stewardship is an important part of our strategy and have developed priority sustainability themes:

• Gender equality
• Living wages
• Climate action

Our investment manager, Cardano, has partnered with Sustainalytics to enhance stewardship across our investment portfolios, engaging with companies on our priority themes.

We also respond to public policy consultations where we believe policy and regulation can advance our sustainability objectives.

We're a member of the Occupational Pensions Stewardship Council, where we work with other UK pension funds on a range of topics, including sustainability and we've also joined the Institutional Investors Group on Climate Change, that provide expert input into our climate change measurement and actions, as well as Climate Action 100+ and Pensions for Purpose.

How are you planning to evolve this fund's investment strategy and approach to sustainability over the coming 12 months?

We undertake a triennial strategic investment review which is underway and due to complete by early 2024. At present the trustee is in the early stages of this review, focussing on the trust's membership and their investment beliefs. This will inform the later stages of the review, including objective setting and investment strategy design. Our approach to sustainability informs our investment decisions and the Trustee have recently met for a sustainability and stewardship day to discuss priorities to progress over the coming months.

In March and April 2023, we met with a number of members and employers for a series of responsible investment focus groups. We are now reflecting on the analysis and conclusions of this research, with findings reflected in our next TCFD report. This research will enhance our governance around climate change and will inform how we communicate with members and more widely on our sustainability approach and ESG activity.

We will continue to leverage strategic partnerships with our investment manager, Cardano, and Sustainalytics, as a leading ESG research, ratings, and analytics firm, to further our stewardship activities, as well as engage directly, prioritising our three sustainability themes:

• Gender equality: All women, men, girls, and boys should have equal rights, responsibilities, and opportunities
• Living wages: All companies should pay their employees a living wage
• Climate action: A speedy and fair transition to a low-carbon economy is the only way to address the climate crisis

We intend to raise more awareness to the activities we are undertaking in our annual Implementation Statement and TCFD report. We also intend to publish a stewardship policy in due course.

Scottish Widows

What is the official name of your main default fund for growth phase members?

Scottish Widows Pension Portfolio Two.

What is the size of this fund (AUM) in £?

£26.0bn as at 31 December 2022.

Describe the investment strategy of this fund 

The fund is used predominately as the growth phase component fund of our flagship default lifestyle, which we call the pension investment approaches (PIAs). Launched in 2006, the PIAs are our flagship, low-cost and fully governed suite of lifestyles. With over £50bn of assets, the PIAs are a trusted solution for over two million pension-savers.

For just 0.10%, inclusive of fund expenses, members can be assured that Scottish Widows will look after the retirement journey from start-to-finish and are responsible for all investment decisions.

The Pension Portfolio Two Fund is used in the growth phase of the PIA Balanced Targeting Flexible Access lifestyle and is designed with the intention of generating long-term real returns, which we measure relative to inflation (UK CPI + 3%).

The principle behind the investment strategy is that key asset classes, accessed via low-cost component funds, drive the majority of long-term returns. And that all else being equal, keeping costs low is vital to safeguarding member outcomes.

Scottish Widows' investment experts set the strategic asset allocation (SAA) of the fund. We utilise a forward-looking investment approach where we optimise the asset allocation based on stochastic modelling that considers a range of economic, market and climate change conditions. However, we do apply a qualitive overlay to ensure the inputs and outputs within the model are aligned with our investment thinking.

We review the SAA every 12-18 months. Our reviews ensure that the fund's asset allocation is positioned to reflect changes in market conditions and future market outlook.

Describe the sustainability (ESG) approach of this fund?

We use four levers to integrate ESG into the fund:

1. Screening - We exclude companies that due to the nature of their business, engagement would make no difference to their long-term prospects.

• All equity/REITs exposure within PIA now tracks indices which exclude certain stocks on ESG grounds.
• All Sterling Corporate Bond exposure excludes a variety of stocks on ESG grounds.

2. Allocation/ESG Tilts - Climate Aware Strategies:

• We worked with BlackRock to design the Climate Transition Fund, allocating over £4.2bn of PP2's assets. The fund backs businesses that decrease carbon emissions, increase clean technology, and display more efficient water and waste management. It does this while maintaining broad market and sector diversification within a 75bp tracking error.
• Making up 10% of the global corporate bond exposure, the Global Credit ESG Insights Fund aims to provide broad-based exposure to global investment grade bonds while improving the ESG and carbon metrics of the portfolio. The fund reduces the carbon intensity of the portfolio by 30-50% relative to the parent index. It achieves this while maintaining broad market and credit rating diversification within a 100bp tracking error.
• Making up 100% of the REITs exposure, the iShares Environmental & Low Carbon Tilt REITs Fund, adjusts constituent weights based on percentage improvement across 1) Green building certification, 2) Energy usage, and 3) Carbon emissions.
• In total, PP2 invests c£5.7bn in climate-aware strategies.

3. Stewardship - We target our Stewardship initiatives across three core pillars - monitoring and oversight of our appointed investment managers, direct and collective engagement with material investee companies and contributing to industry-wide initiatives like those related to policy advocacy. We aim to underpin this activity through dialogue and engagement with our customers and members. We were proud to be one of the first signatories to the UK Stewardship Code and continue to uphold our signatory status.

4. Integration - We integrate climate risks and opportunities into our risk/return modelling when optimising asset allocation.

How are you planning to evolve this fund's investment strategy and approach to sustainability over the coming 12 months?

We have no plans to change the fund's investment objective as we still believe members investing into this fund, via the PIAs, need to aim to generate real returns over the longer-term. We will still measure this relative to inflation (UK CPI + 3%) over the longer-term term (five years or more).

We are in the process of making several changes to the fund's asset allocation that we think will improve the overall risk/return profile. This includes:

1. Equities - reducing the UK equity bias. The fund currently has around 18.5% of its regional equity weighting in the UK. We are making a further reduction of the UK allocation by adjusting it down to 12.5%. We will use this to increase the allocation to global equities.
2. Bonds - Further diversify the bond allocation of the fund by making a small allocation to short duration government bonds. Our view is that as yields have risen, short duration government bonds now provide an opportunity for greater returns while improving downside protection. This will improve the overall risk/return profile of the fund.
3. Property - We have decided to reduce our allocation to REITs across the Pension Portfolio range. We are trimming the allocation given our view on the likely challenging longer-term outlook for property markets in an environment of higher interest rates and possibly more challenging credit conditions.

We will continue to enhance the ESG profile of the fund:

1. Continue to allocate to Climate-Aware Strategies, where practicable. Any historic modelling cannot forecast accurately the dynamic path of markets driven by the changing cost of capital of ESG (especially carbon related) driven factors. Our preference is, therefore, to average in over time.
2. Work with the underlying fund managers to ensure more of the underlying assets meet our exclusions policy. Our focus over the next 12 months is on the Global Corporate Bond and Cash investments.
3. We have been working State Street to enable us to direct votes using the ISS SRI Policy. This is now in place for the voting season and means we have a consistent voting policy across all equity funds in the Pension Portfolio Funds. The policy we have chosen covers environmental (including climate), social and governance factors, seeks to support relevant shareholder proposals on ESG, and asks companies to evidence positive action they have taken.

Smart Pension Master Trust

What is the official name of your main default fund for growth phase members?

Smart Sustainable Growth Fund

What is the size of this fund (AUM) in £?

£ 2.22bn

Describe the investment strategy of this fund.

The fund aims to provide strong long-term returns by investing in diversified growth assets. The fund invests 80% in listed equity (77% in passive ESG-tilted and climate transition equities and 3% in an active biodiversity strategy), 10% is allocated to green bonds and 10% to a dual credit fund which invests in corporate bonds and private credit (around 40%/60% respectively). The return objective of the fund is inflation (Consumer Price Index) + 3.5% per annum.

The fund has a net zero target of 2040. We are focused on achieving great outcomes for our members. We want to help them secure not just long-term financial growth but also a safer, healthier world in which they can retire. At the end of 2022, we had reduced our scope 1 and 2 carbon equivalent emissions by 50%, two years ahead of our 50% reduction target. This is also ahead of the goals of the Paris Agreement, which called for emissions to be reduced by 45% by 2030 and to reach net zero by 2050.

The Smart Sustainable Growth Fund aims to invest in a sustainable way, by considering ESG risks and investing in companies that consider their impact on the environment and society. The strategy involves portfolio decisions using two approaches - ‘reduce negative impact' and ‘increase positive impact'. We can reduce negative impact by removing the most risky companies, and increase positive impact by stewarding our assets which are inbetween on their way to better things and allocating towards opportunities to help solve some of the world's biggest environmental and societal issues, such as reducing biodiversity loss and climate solutions. 

In terms of removing the worst offending companies, all of our fund managers seek to minimise financially material risks to protect long-term returns by excluding companies that:

• are involved in the manufacturing of controversial weapons (chemical weapons, biological weapons, nuclear weapons, anti-personnel mines and cluster munitions);
• derive the majority of their revenues from coal mining. Not only does coal put out the most carbon dioxide per unit of energy vs other fossil fuels, it also has dangerous working conditions, it causes mercury pollution, acid rain and can pollute nearby water with sediments and chemicals. Therefore we do not see the stewardship benefits, as seen in other fossil fuel companies;
• violate the United Nations Global Compact standards on human rights, labour, the environment and corruption;
• refuse to engage or change behaviour; and
• fail to meet our external managers' minimum standards for climate transition.

When looking at the positive opportunities, the default growth fund allocates 13% to impact funds, including 3% to a biodiversity equity strategy (managed by AXA) which aims to invest in sustainable materials, land and animal preservation, water ecosystems, recycling and recirculation. The other 10% is to a global green bond fund (managed by Mirova) which invests in projects looking to generate an environmental and/or social benefit alongside a financial return, such as electric vehicles, hydrogen fuel cells, improved battery recycling and sustainable forestry management.

How are you planning to evolve this fund's investment strategy and approach to sustainability over the coming 12 months?

In order to support our net zero goals, our equity allocation in the default growth fund will focus on decarbonisation and climate transition. Our passive equity allocations have embedded targets to reduce carbon emissions by 30-50% vs their parent index and decrease the weighted average carbon intensity by at least 7% year-on-year, and are aligned with a 1.5 degree scenario. We select external managers who have a great focus on engaging with companies to directly influence ESG issues.

Engagement will be a key focus for us going forward and to help with this, we are setting up an "expression of wish" tool, powered by Tumelo, in relation to the scheme's investments managed by Legal & General Investment Management (LGIM). This informs the in-house investments team of upcoming votes and offers an opportunity to express a wish of how to vote, to LGIM.

In addition, we are implementing a new ‘split voting' policy for a new external manager that the fund will allocate 20% of our existing equity holding to. Going forward, wherever possible, the Trustee will look to put in place a ‘split voting' policy, which refers to an arrangement where the voting rights associated with investment assets are given directly to the trustee, rather than being pooled together with other investors and therefore directed by the manager. Member feedback and surveys carried out will feed into the trustee's voting and engagement policy and any accompanying split voting policies to ensure that the interests of the scheme and our members are better aligned.

Standard Life DC Master Trust

What is the official name of your main default fund for growth phase members?

The official name of our main default fund for growth phase members is Sustainable Multi Asset Growth Fund.

There are three main stages in our default investment solution, the Sustainable Multi Asset Universal Strategic Lifestyle Profile (SLP)

• Growth stage - usually when a member is more than 15 years from retirement.
• Pre-Retirement stage -when a member is around 15 years from retirement.
• At retirement stage - when a member is around 10 years from retirement.

A fuller explanation on how the lifestyle profile works is detailed on pages 3 and 4 of this document.

What is the size of this fund (AUM) in £?

£2.4bn as at 31 December 2022.

The total AUM across each of the funds used within our default investment option, the Sustainable Multi Asset Universal SLP, as at 31 Dec 2022 was £3.67bn.

Describe the investment strategy of this fund

Investment methodology: Sustainable Multi Asset aims to deliver the growth required to support members in achieving a PLSA Moderate income level in retirement. In the accumulation phase a 79% allocation to diverse regional equity asset classes is the primary growth driver, supported by diversification through the use of Emerging Market debt, property and a range of fixed interest instruments.

Underlying funds: The primary asset classes are fulfilled by our Sustainable Index components - these are our bespoke index strategies which take an innovative blended approach to mitigate the financially material sustainability risks associated with ESG factors and have specific sustainability targets.

We also use a blend of other approaches including active management and select managers who we believe will best deliver the preferred strategies for each asset class and meet the objectives of our Sustainable Multi Asset solutions.

Describe the sustainability (ESG) approach of this fund?

A full ESG approach:

• In our approach to ESG, we haven't just added a climate solution - we have a full environmental, social and governance approach
• We have some of the highest levels of ESG content in the market, with 83% of the growth fund currently invested responsibly. And there's more to come - with the planned launch of further sustainable bond funds.
• The strategy prioritises financial returns - it is focused on returns and managing the financial risks associated with sustainability

• Equity investments (79% of the growth fund - strategic asset allocation as at March 2023) track sustainable indices that use exclusions, tilts and stewardship to achieve specific targets. We report on these targets quarterly for our equity exposure:

• • • Reduce carbon intensity by 50% (compared to the parent index)
    • Increase green technology revenues by 50% (compared to the parent index)
    • Enhance ESG scores by 10-20% (compared to the parent index)

We use a three pillar approach:

• Avoiding the bad - we exclude companies in sectors with significant ESG risk:

• • Controversial weapons
  • Tobacco production and distribution
  • Thermal coal and unconventional oil/gas
  • UN Global compact fail and ESG controversies

• Improving the good - we lift the ESG profile of the portfolio by tilting towards stocks with:

• • better ESG scores
  • lower carbon intensity
  • greater exposure to green technology revenue

• Driving change for the better - we use engagement and proxy voting to drive positive change
  • Influencing positive change through stewardship utilising proxy voting and company engagement to drive positive behaviour.

• Listed Real Estate (4% of the growth fund - strategic asset allocation as at March 2023) Comprises exclusions and tilts, aiming to improve green building certification (30% improvement), energy usage (10% improvement) and carbon emissions (20% improvement in carbon intensity).

How are you planning to evolve this fund's investment strategy and approach to sustainability over the coming 12 months?

Introduction of additional sustainable asset classes: Working with Phoenix Asset Management and our strategic partners, we intend to introduce sustainable UK and global bond components to the solution this year.

 

The People's Pension

What is the official name of your main default fund for growth phase members?

The Global Investments (up to 85%) Shares Fund

What is the size of this fund (AUM) in £?

£15.2bn as at 31 December 2022.

Describe the investment strategy of this fund

The People's Pension Global Investments (up to 85% shares) Fund aims to achieve long-term capital growth by investing in a range of asset classes in the UK and overseas. These can include, but are not limited to, equities, government bonds, corporate bonds. The fund is medium / high risk and will typically hold up to 85% in equities, with a mix of UK and overseas equities.

Describe the sustainability (ESG) approach of this fund?

We consider climate change to be the most material sustainability (ESG) risk to member outcomes. As indicated in our climate change policy, we use the following strategic framework to guide our investment and stewardship decision making. It is divided into three pillars: portfolio construction, stewardship and reporting.

• Portfolio
  • Construction: Consider and manage climate risks and opportunities as part of our portfolio construction (principle 1).
• Stewardship:
  • Manage and track progress against our climate stewardship priorities (Principle 2)
  • Integrate climate risk in how we select, appoint and monitor our fund managers and other service providers (principle 3)
  • Hold investee companies to account for the actions they are taking to address climate change risks (principle 4)
  • Engage with the wider investment industry to ensure that it is fit for purpose to achieve our ambition (principle 5)
  • Collaborate with other like-minded investors and stakeholders to increase influence (principle 6)
• Reporting
  • Annually report on our progress through appropriate reporting (principle 7)

How are you planning to evolve this fund's investment strategy and approach to sustainability over the coming 12 months?

With respect to climate change, we have made the following commitments in our 2022 TCFD report.

We have agreed that in order to manage climate risk we will:

• Consider the impact of transition risk when making asset allocation decisions,
• Construct portfolios to reflect climate factors that could positively or negatively affect investment return,
• Integrate GHG levels and their path in the future into weights of portfolio assets,
• Prioritise managing the growth pool risks and opportunities.

Currently, we are in the midst of evaluating our options on how to deliver against these TCFD commitments, as well as our wider commitment to align our portfolio to 1.5 degrees (as per our CC policy).

TPT Retirement Solutions

What is the official name of your main default fund for growth phase members?

TPT Target Date Fund

What is the size of this fund (AUM) in £?

DC assets under management was £2.51bn as at 31 December 2022.

Describe the investment strategy of this fund

TPT's investment default is a customised target date fund (TDF) strategy managed by AllianceBernstein (AB). AB has a clear and defined mandate that is aligned to TPT's membership, which is reviewed annually using AB's proprietary membership analysis tool. AB manages the asset allocation to an investment objective of CPI plus 4% p.a. over the life of the savings journey. Progressively the strategy moves from riskier, capital growth-oriented assets, such as equities and real assets, into lower-risk, retirement income protection-oriented assets, such as bonds, as it approaches and passes its target date.

The TDFs use a selection of third-party investment managers' funds, which are predominantly passive/systematic in nature for efficient DC implementation.

Each TDF is designed and managed for an investor saving to retire in or around the years stated in its name (the target date). AB's aim is to maximise, for a typical such investor, their eventual retirement income while taking account of their decreasing capacity to afford losses as they approach and, possibly, go past the target date of retirement.

Recognising that asset allocation is the dominant factor in determining investment returns, AB keeps the strategic asset allocation of the funds under constant review to allow for changes to investment markets, legislation, member behaviour, and new investment insights. Also, the funds are proactively reviewed daily using a dynamic asset allocation strategy which seeks to mitigate the effects of large market movements without detracting from long-term returns.

During 2023-24, the strategy will become a to-and-through whole of life TDF range, with dual share classes that enable an easy switch for members from accumulating retirement savings into flexible income drawdown. The aim is to make the member's journey into retirement as seamless as possible with a default option post-retirement.

All of this is delivered via a low cost, high-value approach.

Describe the sustainability (ESG) approach of this fund?

As an asset allocator, AB integrates ESG into the TDFs using custom fund arrangements wherever possible, for the flexibility to achieve an alignment with TPT's ESG policies. Where this is not possible, AB reviews the managers' UNPRI signatory status, ESG and ownership/stewardship policies, and proxy voting history to ensure that any appointed manager is as closely aligned as possible.

ESG integration is achieved by combining positive and negative screening. For example, there is a positive tilt within TPT's multi-factor equity allocation, which has improved the overall strategy's ESG characteristics across the broadest range of metrics possible, including those related to carbon. In terms of carbon-related actions, thermal coal (as the most carbon-intensive fossil fuel used for power generation) has been removed from the TDFs, and further tilts have been applied at the underlying fund level. These seek to reduce the transition risks that may exist from companies that are likely more sensitive to the pace of adoption of climate change policies by governments and product decisions by consumers. One such allocation uses an index methodology that is recognised as an official EU Climate Transition Benchmark (CTB), meeting high climate standards.

A climate change action plan has been established for the TDFs. Aligned with TPT's climate action plan, this highlights a commitment to halving carbon intensity by 2030, with significant progress already made towards the decarbonization trajectory for the 1.5-degree scenario, and a net zero position by 2050.

A Sustainable Opportunities sleeve offers diversification to enhance returns with attractive characteristics in income (near-term cashflows), inflation (inflation linkages or sensitivity) and impact (deployment of new capital to sustainable projects). AB is growing this sleeve, recently adding onshore/offshore wind assets and battery storage in the UK and Europe, and solar power generation in fast growing economies of Asia.

How are you planning to evolve this fund's investment strategy and approach to sustainability over the coming 12 months?

AB recognises that investor preferences are evolving from a focus on negative screening, and as an organisation AB is experienced in offering investment options that extend beyond ESG integration. This includes tilts toward allocations seeking attractive investments that contribute to positive environmental and social outcomes, which is offered via TPT's Ethical Retirement Strategies alongside the core default strategy to those employers who wish to access ethical investment exposures. The Ethical Retirement Strategies has been delivering similar financial returns despite the moderately smaller investment universe available under strict ESG guidelines.

With inflation forecasts looking high for longer, diversification remains key in delivering attractive returns for members. More specifically on individual sleeves, AB aims to further increase the allocation size of its sustainable opportunities sleeve and the number of holdings therein, not limited to digital infrastructure, climate solutions, affordable healthcare developments, sustainable food and water providers, and social housing among other investment opportunities. AB is also researching more efficient options that could potentially incorporate ESG approaches to TPT's commodities and REITS allocations.

AB is looking to further improve the alignment of the TDFs towards TPT's ESG policies and the net zero approach via the structure of underlying fund components. Research is underway to increase control of the stewardship activity that's possible via the TDFs in line with TPT's preferences and policies. In the year ahead, AB will evaluate opportunities to leverage its data capabilities to provide even more transparency and support to TPT. This includes meeting TCFD requirements for scenario analysis and the conceptualization of standalone ESG reporting that TPT can use to engage on ESG issues with members.

A benefit of the structure of TPT's investment default is that its allocations will continue to evolve over time through research conducted by AB on other areas of ESG including biodiversity.