Case study: Implementing sustainable investing at Scottish Widows

Tuesday 15 February 2022

A review of how Scottish Widows are actioning climate stewardship and taking their responsible investing strategies forward.

Overview of Scottish Widows approach

As the UK continues on its roadmap to sustainable investing, the UK pensions industry is currently embarking on new mandatory sustainability disclosures as part of the recent Pensions Schemes Act 2021; the Act opted to use the Taskforce on Climate-related Financial Disclosures (TCFD) framework as the basis for new requirements on climate change. In this case, we share the current approach used by Scottish Widows (Scottish Widows Master Trust is regulated by the UK Department of Work and Pensions) when considering responsible and sustainable investing within the context of their £170 billion (as of 31 December 2021) total investment portfolio and c6 million customers.



Scottish Widows have designed a Responsible Investment and Stewardship Framework to guide their investment decisions and have been implementing it since its introduction in early 2020. Their investment portfolio of approx. £170billion is comprised of around 85% of life and pension products, retails savings and investments with the remainder classified as shareholder investments. 

  • invest responsibly, 

  • operate an exclusions policy, 

  • reduce the portfolio carbon footprint, 

  • offer a fund range aligned to customer values, 

  • seek to integrate across asset classes, and 

  • promote private market investment opportunities. 

Scottish Widows are keen to both address the risks as well as take advantage of the opportunities arising from the transition to a low carbon economy so as to improve the outcomes for both members and society. 

Scottish Widows surveyed its members in 2020.  This highlighted their members’ strong desire to have opportunities to invest in funds which took climate and sustainability into consideration. As a result, they increased the number of available ESG-focused strategies to cater for their members’ wishes. Two examples of this are: i) the co-creation by Scottish Widows and Blackrock of the Blackrock Climate Transition fund (investing approx. £2bn at launch, with this amount surpassing £5bn at the end of 2021), which was added both to its default and self-select fund options for members of the Scottish Widows Master Trust and ii) the relaunch of the Scottish Widows Environmental Fund with an impact-orientated focus.


Climate Action

Scottish Widows have been contributors to the Institutional Investors Group on Climate Change’s (IIGCC) Net Zero Investment Framework and use this as a basis for their voluntary net zero strategy. Their three goals are: i) to be net zero by 2050, ii) to halve their portfolio carbon footprint by 2030 and iii) to increase their investment in climate-aware strategies by up to £25bn, including at least £1bn in climate solutions by 2025. Using the recommendations from the framework, their asset class focus for decarbonisation is across listed equity, listed and unlisted corporate credit and real estate (physical assets). They have found the framework to be an effective blueprint by which to formulate a strategy to move their investment portfolio towards net zero and are currently incorporating these recommendations into their investment decision making processes. The main components of the framework cover: 

  • governance and strategy, 
  • targets and objectives, 
  • strategic asset allocation, 
  • asset class alignment, 
  • policy advocacy, and 
  • market engagement. 

Over 2021 Scottish Widows have been working on a detailed climate action plan, which will be published in 2022; they are also publishing their portfolio carbon footprint on an annual basis. Carbon footprint targets are being determined using the definition of carbon / total value of the investment portfolio (excluding offsets etc.) They envisage that by certain target dates during their journey to net zero, the majority of their assets will have either transitioned and or will have a credible plan to transition to net zero.


Decarbonising their investment portfolio

Scottish Widows’ carbon foot-printing exercise has been a huge undertaking, given that they have over 20,000 counterparties within their investment portfolio, where they have used the Global GHG Accounting and Reporting Standard methodology developed by the Partnership for Carbon Accounting Financials (PCAF) as recommended by the IIGCC. One of the most challenging areas has been their non-listed investments within their loans book. 

In sourcing their carbon metrics, Scottish Widows use S&P Trucost, but they found that a very large data cleaning exercise was needed to accurately map carbon data from their provider to their investment counterparties. For 2019, Scottish Widows reported scope 1 and 2 of their financed emissions (effectively their Scope 3) across approx. 77% of their in-scope policyholder and annuity assets; as per IIGCC recommendations, they are not yet reporting investee companies’ scope 3 emissions given that the breadth, depth and accuracy of scope 3 emissions data is still lacking. 

For listed and public investments, Scottish Widows has used emissions data sourced from S&P Trucost for their portfolio emissions calculations. For private investments within their loan investment book, Scottish Widows has used sector-based averages sourced from the Office for National Statistics and the Department for Business, Energy & Industrial Strategy, in line with the PCAF methodology. They did choose to exclude some elements of their loan book (in particular, loans to corporate real estate) due to lack of robust data on the emissions of the underlying properties.

They are aiming for greater asset coverage in subsequent reports. In their potential roadmap for disclosures, the plan would be to include portfolio scope 3 reporting as the industry adopts this practice, but initially not to set scope 3-related targets as they have done for their existing scope 1 and 2 portfolio emissions. Currently, Scottish Widows’ carbon foot-printing excludes asset classes for which PCAF methodology isn’t available, like sovereign fixed income investments. They also shared that this may not be as material for their own footprint as their exposure to sovereign debt is less than 10% of their investment portfolio. Derivatives are also excluded for similar reasons but also make up a far smaller proportion of the investment portfolio.

Scottish Widows have investments in both their own funds and external pooled funds:

  • They are able to exercise a far higher degree of influence on the investment strategies and policies of their own funds and have proactively adopted responsible investing strategies including negative screening of certain themes etc. 

  • With respect to pooled funds, they are members and contributors to the UK government-led


Taskforce on Pension Scheme Voting Implementation, which aims to increase and improve the quality in voting of equity shares by pension schemes and lead on an engagement campaign with asset managers via their membership of the Occupational Pensions Stewardship Council. 

Scottish Widows also engage and follow the activities of their asset managers, including their respective affiliations such as the Net Zero Asset Managers Initiative6. While data availability is fast improving, they continue to see challenges with the lack of standardised data and definitions across asset managers and the industry. Their observation is that each manager will use the data most relevant to their own needs, which can even vary across different strategies within the same institution. For users of this data, like Scottish Widows, who are effectively aggregators across multiple managers, these different methodologies in deriving meaningful climate metrics pose problems with respect to the robustness of the final aggregated metrics.  For example, the Implied Temperature Rise (ITR) metric, which is suggested by both the TCFD and the UK Government’s Department of Work and Pensions, does not meet Scottish Widows’ robust criteria if calculated using available methods and resources. At the moment, they are not planning to rely on manager disclosures to support their clients with reporting in line with current DWP requirements on climate disclosures and are building internal capabilities to meet the upcoming FCA’s requirements around TCFD. 


Climate scenario analysis

The approach Scottish Widows has used to climate scenario analysis was based on those prescribed by the Bank of England’s Climate Biennial Exploratory Scenario (CBES)which in turn are based on the Network for Greening Financial System (NGFS). The Bank of England has provided estimates for a number of macroeconomic and physical risk inputs, such as CPI, risk free rates, equity index performance, fixed income spreads etc. so as to facilitate modelling for banks and insurers. 

The three scenarios used are:

  • early action scenario targeting 1.8 C rise with an orderly transition,
  • late-action scenario with minimal climate change efforts initially followed by dramatic actions post 2030, which limits the rise to 1.8 C,
  • and no additional action taken leading to 3.3C rise. 

Focusing on the asset modelling exercise undertaken by Scottish Widows, they have modelled asset level holdings data (as opposed to modelling at the index level) for each of the scenarios over the next thirty years with respect to the impact of climate risk. Scottish Widows have engaged Baringa for the actual modelling exercise. Results were generated of asset valuations in each of the three scenarios, and this allowed projections of the rankings of investment sectors by their sensitivity to climate risk in each of the three scenarios.  


Actioning climate stewardshipClimate action

Scottish Widow’s stewardship policy focuses on the following activities: 

  • act as responsible stewards of their assets
  • influence companies they invest in to drive positive change,
  • exercise strong governance over the asset managers they partner with,
  • collaborate with both asset managers and investee companies and other asset owners,
  • governance and escalation of stewardship issues, and
  • reporting and disclosure on stewardship activities and results.

Given that Scottish Widows use the services of over 80 asset managers, they have prioritised their engagement efforts and applied a tiering system, placing each of them in Tiers 1-4, based on their relative exposure and influence. The tiering determines the level of engagement and expectation that Scottish Widows has with regards to their investment managers implementing their framework and policies. Across their investment portfolio, Tier 1 and 2 managers account for approximately two-thirds of these assets, with Tier 1 generally consisting of segregated mandates and Tier 2 comprising pooled funds. Scottish Widows meet with these groups monthly or at a minimum quarterly in order to closely follow detailed stewardship activities being implemented by the asset managers. General areas which they cover include the core responsible investing themes the managers are focusing on and how they are actioning stewardship through case study examples and active involvement in industry initiatives.

With their Tier 3 and 4 managers, Scottish Widows monitor their activities using other criteria; these include, for example, looking at their Principles for Responsible Investing (PRI) assessment ratings and ShareAction rankings and/or giving them a deadline to become signatories of the Financial Reporting Council’s (FRC) 2020 UK Stewardship Code. 

Pillar II: Direct engagement with their larger holdings 

Scottish Widows have three major areas of focus with respect to these assets: 

One example of stewardship activity for UNGC which they shared was their engagement with a large US-based retailer on their labour and collective bargaining issues. Another one would be the fact that Scottish Widows have also recently published a thought leadership paper on the topic of board cognitive diversity (Great minds don’t think alike) and they are engaging with their largest investee companies on this subject. 

Pillar III: Industry-led collaborations 

Scottish Widows is actively involved in a number of industry-wide stewardship initiatives, for example Institutional Investor Group on Climate Change, OPSC and others. As part of OPSC, Scottish Widows are leading on an engagement campaign with the largest asset managers operating in UK pensions to break down barriers to client directed voting and normalise expression of wishes by pension schemes when it comes to voting in pooled funds. 

Pillar IV: Client and membership intent and wishes

The first three pillars are underpinned by the foundation which is the input and consideration of the intent and wishes of members and clients. To enable this, Scottish Widows have active dialogues with their clients and members through engagement surveys, focus group meetings and are now developing more tools (such as the recently launched responsible investing feature in the Scottish Widows pensions app (Find Your Impact) to better understand the responsible investing and stewardship wishes of their customer base. 

Scottish Widows are supportive of stewardship principles and exercising a “collective view and vote” on specific issues e.g. involvement with the IIGCC collaborative voting recommendations on climate. They are currently in the process of authoring their own voting guidelines as a basis to represent their positioning on specific issues in the market.  

When reflecting on which resources have most helped their stewardship activities, Scottish Widows cited the World Benchmarking Alliance for its helpful intersectionality inputs. Other organisations include the IIGCC, the OPSC, the International Corporate Governance Network, InfluenceMaps and ShareAction (e.g. their shareholder resolution list to watch, their manager assessment rating) alongside companies’ own disclosures. (A list of organisations that Scottish Widows is involved with across different thematic areas is available at the end of the report.)


Moving forward

On the horizon, Scottish Widows are looking to increase allocations to ESG-focused assets, increase the focus of conversations with their managers on the areas of biodiversity and just transition. They will continue to follow new inputs and data closely across an increasing number of thematic areas to help develop their investment approach. They have shared that they will continue to have annual climate reporting and aim to have their next major review of their climate targets and alignment planning in 2024.


Key Responsible Investment Memberships



Contribute to raising Stewardship standards by Pension Schemes

Understand the implications of sustainability for investors and incorporate these issues into investment decision-making and ownership practices, contributing to the development of a more sustainable global financial system.

Enhancing the quality of stewardship in the investment industry to help improve long-term risk-adjusted returns to shareholders.

Signatories to the PAII’s Net Zero Asset Owner Commitment, actioning 10 commitments to decarbonise investment portfolios; to play our part in the global achievement of the Paris Agreement goals.

Supporting and advocating for more and better data to evaluate companies' plans for transitioning to a low-carbon economy.

Help develop tools, resources, and collective engagement by collaborating with the group’s network of 150+ members to take a pro-active approach to managing risks and opportunities related to climate change. Members of three working groups: climate solutions, top-down implementation, and net zero stewardship.

Supporting and advocating for collective engagement with companies on climate change.

Participate as industry member for UKSIF advisory group to UK Taxonomy working group, to help craft its position on any UK version of the EU Taxonomy and SFDR.

Member of climate change sub-group and working group. Develop guidance that British insurers and their customers can use to decarbonise portfolios and provide investment capital for the UK to meet national goals on carbon reduction.

Influencing policy at global level and educational resources.

UN-backed initiative for non-state actors to take action to halve emissions by 2030. Partners to the initiative agree to four criteria; make 2050 net-zero pledge, plan and proceed in taking action, and publish on progress.

Supporting and advocating for businesses to make real, positive contributions to the Sustainable Development Goals (SDGs).





 Arun Kelshiker, CFA


Review contributors:


Tarik Ben-Saud, CFA; Alexander Beecraft, CFA; Alistair Byrne, PhD, CFA; Olivier Fines, CFA; Alistair Jones, IMC; Stephen O'Neill, CFA;  David Rae, CFA; Issac Tabner, PhD, CFA, ASIP, DipPFs; Natalie Winterfrost, CFA, AMAPPT, FIA.

With special thanks to Andrew Burton, Avi Chatterjee, Maria Nazarova-Doyle, CFA, Shipra Gupta and Dr. Stephen Porter for their contributions. 

Thanks also to the oversight of CFA UK's Professionalism Steering Committee