• Economic Research
  • ESG
  • Responsible Investing

Facing up to the ESG backlash

Asset managers must better explain how ESG can improve investment returns and make the world a better place. Clear guidance to help investors choose between funds is also required.

Facing up to the ESG backlash

Asset managers appear to be placing greater emphasis on environmental, social and governance (how companies are managed) factors as part of their investment decision making. Yet recent months have seen growing criticism of the focus on ESG (as it is known), with critics dismissing it as a worthless vanity exercise.

Some commentators have cited Russia’s invasion of Ukraine as ‘evidence’ investors have mistakenly turned away from fossil fuels on ESG grounds and are ‘too focused on climate change’.

However, we were among a number of asset managers that had limited exposure to Russia going into the crisis largely as a result of ESG concerns.

Russia’s invasion highlights the urgent need to accelerate the transition to green, renewable energy

If anything, Russia’s invasion highlights the urgent need to accelerate the transition to green, renewable energy so we are not dependent on supplies from hostile and unpredictable regimes. We must decide what kind of world we want to live in and take strategic actions to build it. That will be difficult, requires sacrifice, and comes with short-term criticism.

Going back to coal in the face of the threat posed by climate change to the planet (and therefore companies and countries) does not make for grown-up, strategic thinking. 

Critical to investment success

ESG is not a fad; it is an investment belief. Companies, and indeed governments, that conduct their business in a respectful way, with an eye on the long-term, are more likely to succeed over time. Bad practices don’t just hit the headlines, they hit profits as well.

As such, integrating ESG into our investment process is non-negotiable. Understanding these issues allows us to spot and manage investment risks, as well as capture opportunities. Regulation is also directing money towards more sustainable investments.  

Asset managers must do a better job in defining and explaining ESG and their actions in this area. At Aviva Investors, we’ve been using our influence and voice – sometimes very loudly – to influence the behaviour of companies we invest in for five decades with positive outcomes for those businesses as well as the wider economy and society.

ESG considerations help us assess the risks and opportunities associated with investments

ESG considerations help us assess the risks and opportunities associated with investments. This process provides essential information to portfolio managers to inform their decisions and drive better financial outcomes.

Including ESG in the investment process does not mean excluding certain sectors. Indeed, it can identify opportunities to turn ‘brown’, or polluting companies, into ‘green’ businesses by investing in and influencing them.

Of course, there are times when we exclude investments at a business, fund or stock level and these decisions are driven by our view of what is the right thing to do.

Currently, it can be hard for investors to differentiate between different ‘sustainable’ funds offered by asset managers. Customers need clear labelling, and UK regulators can help achieve this with their own classifications, something the industry is collaborating on to encourage. A huge amount of education will then be required to ensure customers truly understand the products they are investing in.

It is up to asset managers to define exactly and clearly their values, priorities and red lines, and how these are embedded within their offerings. Clients can then choose managers whose philosophy, approach and products most closely align with their own views.

Three points to remember

  • Criticism that asset managers are focusing too much on ESG factors when making investment decisions is misguided
  • Focusing on these issues can be a key driver of investment returns and improve company behaviour with positive effects on the economy and society
  • Improved labelling of funds and education will be required to ensure customers truly understand the products they are investing in

Related views

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL). Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.