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'Elephant, what Elephant?' AEGON Sustainability Report 2009

By Joss Tantram on June 14, 2010 at 3:46pm.


AEGON is a Dutch based insurance, pension and investment company which operates in over 20 markets in the Americas, Europe and Asia. The company operates under a number of brands in different territories and can trace its history back over 150 years.

The company is in the top 20 largest global insurance companies, employs approximately 28,000 people and has over 40 million customers.

AEGON sought and received financial assistance from the Dutch Government during the financial crisis of EUR 3 billion of capital support. AEGON has since repaid EUR 1 billion and has committed to repaying the remainder of this assistance “as soon as it is feasible and responsible to do so” (p9).

AEGON’s Sustainability Report 2009 represents the first “sustainability” report; it has produced “Corporate Responsibility” reports since 2003.

The insurance sector plays a pivotal role in the maintenance of stable societies and economies, providing a safety net for a wide range of personal, business and wider societal activities. Emerging big picture trends which impact upon insurance risk and the ability of individuals, businesses and countries to obtain insurance cover should be a critical area of focus for insurance companies to analyse and report against.

Such trends are many and varied, and include changing social demographics, health, obesity, resource scarcity and climate change. Best practice in corporate responses to such issues tends to involve the analysis of the risks posed for the delivery of corporate strategy, together with an appropriate response to this analysis in terms of strategic direction and the evolution of strategic and operational performance management.

One issue that has become absolutely and unavoidably strategic for the insurance sector is climate change. Climate change poses a unique “perfect storm” for the sector, as it combines physical risks, increased uncertainty, associated health impacts and significant challenges to fundamental business models and their underlying assumptions.

The scale and scope of this risk has been recognised for a number of years by some sector companies. In the recent Lloyds insurance report “Climate Change: Adapt or Bust” it is noted that:
“It is equally clear that, so far, the industry has not taken changing catastrophe trend seriously enough. Climate change is likely to bring us all a more uncertain future. If we do not take action now to understand the risks and their impact, the changing climate could kill us”. (p4) see: http://www.lloyds.com/NR/rdonlyres/38782611-5ED3-4FDC-85A4-5DEAA88A2DA0/0/FINAL360climatechangereport.pdf) .

So, given such a recognition of scale and scope of such issues by the industry itself, a reader might expect that AEGON, as a major global insurer, whose business is the identification and management of risk, would feature climate change and other relevant risks into its management and reporting of sustainability in a significant manner. Such analysis is strikingly absent.

Climate change is mentioned specifically in the report a total of 5 times. It is mentioned: 1) As an issue to be covered in forthcoming asset management issue briefs; 2) as the name of a Hungarian SRI fund; 3) in reference to the company’s signature on an unnamed investor sector statement calling for a new climate change agreement at Copenhagen; 4) in terms of reducing business travel in the US; 5) in the GRI index section of the report under the heading “financial implications due to climate change” (which refers to a section in the report focussing upon direct operational impacts).

Climate change as a strategic, evolving, game-changing risk to the business of insurance is therefore absent from this report, as indeed is coverage of any of the other ‘big picture’ environmental and social trends and challenges.

Instead, the report is instead substantially focussed upon the impacts of direct operations discloses mostly purely business related information. As a result there is a huge strategic gap highlighted by this report in the company’s approach to sustainability.

Content:

The bulk of this report discloses a great deal of conventional financial, governance and risk information, within which the treatment of non-financial issues is scant. There is no mention of the strategic implications of environmental & social issues and trends.

The report notes that the company continues to focus upon 3 strategic objectives developed in 2008:
- To reallocate capital towards businesses with higher growth and return prospects.
- To improve growth and returns from AEGON’s existing businesses.
- To manage AEGON as an international company.

Given these objectives, it is difficult to see how sustainability is, at best, anything other than an operational issue, and this assumption is further reinforced in the section of the report which discloses environmental and social progress in 2009 (p 16). Within this section there is no mention of overall company impact reductions or the integration of strategic risks. Achievements include the establishment of a Green Team with an operational focus, the introduction of limited external assurance and the completion of a global employee satisfaction survey. A number of more substantive objectives, such as the introduction of company-wide principles for investment, are in progress. The introduction of social and environmental standards for suppliers has been deferred due to an overriding imperative of cost reduction. Time and again this report indicates that not only does the company not “get” sustainability but it also has not made progress on the aspects that it does get.

The overall structure of the report is defined by what the company terms its “Stakeholder Framework” which is presented in diagrammatic form (p 12) listing the company’s identified stakeholders:
- Customers
- Shareholders
- Employees
- Business Partners
- The Wider Community.

These stakeholder groupings are then used as key section headings within the report to cover different areas of performance

The report notes that this Framework has been used to help define the company’s approach to sustainability, and the issues considered to be of “material importance”. Unfortunately, the report does not disclose how the Framework assists in this process and it also fails actually to list material issues.

The Framework also includes the company’s 3 strategic objectives (noted above), but provides no indication of how the issues which pertain to each stakeholder grouping actually relate to, or are supported by, these objectives.

Credibility:

Given the concerns already covered, reviewing the credibility of this report is problematic. Best practice in this area would include an analysis of strategic financial and non-financial risks, integration of non-financial risks into risk management and governance processes, a transparent materiality assessment process and the development of objectives and targets on priority material issues.

The report does feature significant information on risk and governance processes, within the “Shareholders" section. However, there is scant mention of social and environmental risks and it is unclear whether ‘sustainability’ is truly integrated into corporate governance structures and priorities.

A key area to look at when assessing the non- financial impacts of an insurance company is its approach to investment. In AEGON’s case, the introduction of sustainable investment practice appears to be a work in progress. The report section “Investing Responsibly” (p 23) indicates that the company is at an early stage in integrating environmental & social concerns into overall investment practice. In this section the report notes the company’s intentions to introduce an investment framework, which should be in place in 2010.  This section covers a range of SRI activities undertaken by the company, in the form of a number of specific investment funds totalling 0.26% of the company’s revenue generating investments (p 26). Given this low figure, the clear priority for the company is to embed sustainability considerations into its mainstream investment activities, though it should be congratulated for providing a figure for the % of total funds represented by SRI activities.

In this context, the company notes its plans to develop comprehensive investment principles over the next two years and specific investment guidelines on the following areas of concern (p 25):
- Climate change and environment.
- Defence and weapons.
- Tobacco and alcohol.
- Human Rights and discrimination.
- Labour and child labour.
- Political risk, corruption and money laundering.
- Repressive regimes and good governance.

These areas of focus align with those defined by good practice approaches such as the UN Principles for Responsible Investment (see: www.unpri.org/) and the report notes that discussions within AEGON will focus upon “the possibility of further operating units signing up to the United Nations’ Principles for Responsible Investment (UN PRI). AEGON Asset Management UK already adheres to the UN PRI.” (p 25). A key developmental priority for AEGON in taking these plans forward, either through the UN PRI or independently, will be to establish systems and management protocols which would allow the company to drive and monitor progress in the embedding of these issues into mainstream investment practice.

Pages 18 & 19 provide a “Highlights of 2009” table, under the headings Economic, Social/ environmental and Governance. It is striking to note that, of the 8 social/ environmental highlights provided, 4 relate to sponsorship or charitable activities whilst only one refers to a strategic sustainability issue (the company’s signature on an investor statement asking for an agreement to cut CO2 emissions at the Copenhagen conference). Whilst philanthropy and company giving is an aspect of good practice, it’s a very minor one – sustainability should be more about sustainable corporate performance, not charity.

The report includes a GRI contents index, and notes that the company assesses its Application Level to the GRI G3 Guidelines as a “B+”. However, reading this section does give rise to some concerns about the company’s interpretation of the GRI Guidelines. The GRI indicator “financial implications due to climate change” (in GRI Index table on page 90) is intended to determine the company’s understanding of climate change as an issue of strategic business risk, however the company responds to this indicator by pointing to section of the report (“The wider community – Protecting the environment”, p 66) which does not reflect the intent of the indicator, instead noting some relatively minor operational efficiencies in terms of business travel.

The report includes an Assurance Statement, from Ernst & Young, following the Dutch Government’s Standard 3410. The Statement is officially categorized as “limited” and is very shallow, providing no recommendations for further development. The company should consider commissioning a ‘deeper’ Assurance engagement, which would be developmentally useful, and which would provide external feedback and dialogue to support continual improvement.

Communication:
The communication style and approach and style within the report is relatively formal and businesslike, using a small number of photos, tables and graphics. The tone and language used is similarly sober, and whilst this gives the reader the message that this is a business document rather than PR focussed communication, the report does not excite or compel further reading.

Conclusions

Given some of the fundamental challenges noted above, especially with regard to the company’s understanding and integration of global scale social and environmental challenges such as climate change, the overall impression that the report gives is of a company in the early stages of its approach to sustainability. Whilst this may be the company’s first “sustainability” report, it is actually its seventh non-financial report. Given the size and relative importance of the company, a reader might expect to see a more developed and integrated approach to sustainability as a strategic business concern.
There is a wealth of good practice examples out there that AEGON could look to for guidance, not least the UN PRI for approaches to the integration of environment, social and governance issues into investment practice. In addition, companies such as Allianz, Swiss Re and other sector peers highly placed in the SAM annual sustainability ratings could provide useful insights for AEGON.
AEGON has identified some key areas for development and the integration of sustainability issues into business practice. The company needs to be clearer on implementing its intentions, and to be bolder in its approach to sustainability as shaper of future business success, especially with regard to the elephant in everyone’s room, climate change.

Recommendations

- Develop a strategic understanding of the importance and relevance of climate change as a business issue, beyond direct operational impacts.
- Develop a clear plan for the development and embedding of responsible investment principles into investment practice and report progress against this.
- Develop an ongoing reporting of stakeholder concerns, recommendations and company responses which evolves year-on-year.
- Develop and disclose a clear materiality identification process, to Include stakeholder priorities. 
- Structure the report by priority material issues rather than stakeholder audiences.
- Consider a deeper assurance engagement and publish the Assurer’s recommendations.
- Ensure that targets and indicators are truly quantifiable and provide context to allow readers to judge qualitative performance data.

Joss Tantram, Partner – Corporate Sustainability, Terra Consult.
Joss is a specialist in strategic sustainability management consulting. He was a member of the judges on the Association of Chartered and Certified Accountants (ACCA) UK Sustainability Reporting Award, a member of Aviva plc’s external CSR advisory committee for 7 years and contributed to the development of the FORGE guidelines for the management of CSR in the UK finance sector and the development of the forthcoming Social Responsibility Guidance Standard ISO 26000. Joss designed and is a Director of WWF International’s One Planet Leaders global executive development programme, to be delivered for the 5th time in Singapore in Autumn 2010. For more info see: www.terra-consult.co.uk