Case study: Implementing responsible investing at Scottish Widows

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

This case study covers the current approach used by Scottish Widows when considering responsible and sustainable investing within the context of their £190 billion (as of 31 December 2021)   total investment portfolio (comprised of around 85% of life and pension products, retail savings and investments, with the remainder classified as shareholder investments) 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 early 2020.

The key pillars of this framework are:

  • 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 seeks to both address both the risks and opportunities from the transition to a low carbon economy, to benefit both members and society. A survey of members in 2020 highlighted a strong desire for opportunities to invest in funds which took climate and sustainability into consideration. As a result, they increased the number of available ESG-focused strategies. Two examples of this are: i) the co-creation with 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 contributed 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 stated goals are: i) to be net zero by 2050, ii) to halve their portfolio carbon footprint by 2030 and iii) to increase investment in climate-aware strategies by up to £25bn, including at least £1bn in climate solutions by 2025. The focus for decarbonisation is across listed equity, listed and unlisted corporate credit and real estate asset classes. The main components of the framework cover:

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

Scottish Widows first disclosed their portfolio carbon footprint in 2021, followed by the publication of its climate action plan in February 2022 and now publishes their portfolio carbon footprint annually.


Decarbonising the 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.

Scottish Widows use S&P Trucost to provide their carbon metrics for listed and public investments, 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 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 chose to exclude some elements of their loan book (in particular, loans to corporate real estate) due to a 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. In March 2022 Scottish Widows published scope 3 emissions for the most material sectors in their portfolio as part of their first TCFD report. 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:

  • On their own funds they have 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 improve the quality of voting of equity shares by pension schemes.

Scottish Widows also engage and monitor the activities of their asset managers, including their respective affiliations such as the Net Zero Asset Managers Initiative. 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 appear sufficiently robust currently. This implies a need to build internal reporting capabilities.


Climate scenario analysis 

The approach to climate scenario analysis is 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). These provide 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.

Scottish Widows has modelled asset level holdings data (as opposed to modelling at the index level) for each of the scenarios over the next 30 years, engaging Baringa for the actual modelling exercise. Asset valuations under each of the three scenarios allow projections of the rankings of investment sectors by their sensitivity to climate risk in each of the three scenarios.


Actioning stewardship

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.

They apply three core pillars to their stewardship activities, underpinned by the foundation, which traverses the pillars. These pillars and foundation are:

  • close oversight and governance of their core asset managers,
  • direct engagement with the management of the largest holdings,
  • active participation in collaborative industry-wide initiatives, e.g. IIGCC, Occupational Pensions Stewardship Council (OPSC), and
  • listening to the voice of their clients and pension scheme members.


Pillar I: Close oversight and governance of core asset managers

Given that Scottish Widows use the services of over 80 asset managers, they prioritise their engagement using a tiering system, placing each manager 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. Tier 1 and 2 managers account for approximately two-thirds of total assets, with Tier 1 generally consisting of segregated mandates and Tier 2 comprising pooled funds. Scottish Widows meet with these groups at least quarterly in order to closely follow their detailed stewardship activities. The meetings cover the core responsible investing themes the managers are focusing on and how they deliver stewardship through case studies and active involvement in industry initiatives.

Scottish Widows monitor Tier 3 and 4 managers 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 larger holdings

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

One example of stewardship activity with regard to the UNGC is an engagement with a large US-based retailer on labour and collective bargaining. 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-wide collaborations

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


Foundation:  Client and membership intent & 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. These are sourced through engagement surveys and focus group meetings. Further tools are under development (such as a responsible investing feature in the Scottish Widows pensions app (Find Your Impact).

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 and have shared 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.


Moving forward

On the horizon, Scottish Widows are looking to increase allocations to ESG-focused assets and increase the focus of conversations with their managers on the areas of biodiversity and just transition. On a just climate transition, they have published research aimed at the pensions industry Scottish Widows plan a major review of their climate targets and alignment planning in 2024.



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