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Sustainability: Drawing force from lines of tension

Much like a gem is forged under pressure, the ESG movement is powerful because it results from tension at multiple levels: between art and science, absolute and relative, exclusion and engagement. Francois de Bruin explores the lines of tension underpinning the investment approach to sustainability.

Sustainability: Drawing force from lines of tension

Over the course of history, few teenagers have influenced the world as much as Greta Thunberg. Many watched with awe as she made a stand for the planet, inspiring countless others to take to the streets and fearlessly calling powerful leaders to account.

At the World Economic Forum in Davos in January, her demands were uncompromising:

“Immediately halt all investments in fossil-fuel exploration and extraction.

Immediately end all fossil-fuel subsidies.

And immediately and completely divest from fossil fuels.”

Yet as Thunberg was addressing world leaders in Davos, South Africans were facing daily power cuts as national utility Eskom battled through its deteriorating infrastructure. For the country’s population of 59 million people, no electricity for hours on end meant no lights, no warm water, no internet and, in cases of emergency, no help.

South Africa is almost entirely powered by the most environmentally damaging fossil fuel of all: coal. Yet the power cuts showed that if the country abandoned fossil fuels overnight, as Thunberg demanded, millions of its people would be left in dire straits. This raises an uncomfortable question: how can we save the planet without adversely impacting people’s lives? Or to put it another way, how we can we work towards our long-term goals without causing undue short-term pain?

Responsible investors find tensions like this at every turn. As a result, aspirations to invest sustainably are both complex and powerful. Drawing on the concept of connected thinking, three interrelated forms of tension can be brought to light. Although this article explores each one in turn, they should not be considered separately, but together can help elevate the debate, moving from an ‘or’ consideration to an ‘and’ perspective.

Philosophical tension: Art versus science of sustainability

Should we incorporate environmental, social and governance (ESG) considerations because it is the right thing to do, or because of the cold hard facts delivered by scientific evidence?

While our business has been a strong proponent of investing for the right reasons,1 it can sometimes be hard to determine exactly what impact our decisions have.

In 2019, Marte Borhaug, global head of sustainable outcomes at Aviva Investors, commented that she sometimes felt as if she needed a degree in moral philosophy, for instance when her purchase of plastic-free straws arrived wrapped in plastic and having travelled thousands of miles.

It is these moral dilemmas that should anchor our professional conduct; we should not shy away from them

Discussing the complexities, nuances and trade-offs we need to embrace to make a difference, Borhaug said: “It is these moral dilemmas that should anchor our professional conduct; we should not shy away from them.” She advocates interpretation and debate, emphasising that being responsible should never be about creating an ethical straitjacket.2

However, the ambiguity inherent in human motives and behaviour has understandably given rise to proponents of the ESG movement embracing the world of cold, hard data. In 2018, the United Nations’ Exponential Climate Action Roadmap said the question now was, “How do we provide governments, businesses and citizens with shared roadmaps that show the way, which can be defined and redefined as we go?” The report argued the data needed to create these roadmaps was already accessible, from government policies to public emission statistics and published research.3

Yet significant issues remain in collecting data from companies. Reporting quality is a fundamental issue, even for audited financial data, as auditors do not fully check all the information but only give an opinion as to its reasonableness.4

As it is not yet mandatory, disclosure of ESG metrics is not even as comprehensive as this level of flawed financial reporting, allowing the most exposed firms not to disclose their risks. Without clear reporting deadlines, it tends to be published with long delays. Big Data could help bridge the gap by providing investors with the relevant information, though a common prescriptive framework seems some way off.5

Issues in data quality and application therefore need to be balanced against our own ambiguity when interpreting information and the decisions we make from it. This philosophical tension means our approach will forever hang in the balance between art and science; investors should embrace both approaches to harness the best of each.

Performance tension: Absolute versus relative sustainability

The cost-benefit analysis of incorporating ESG is another line of tension branching off in several directions, one of which is the question of investing in companies that already have a good ESG score versus those whose score is improving.6

A commonly cited 2018 Bank of America Merrill Lynch report showed the benefits of selecting above-average ESG rated companies to avoid defaults, making the case for selecting firms based on their current ESG scores.7

A high ESG score can be a useful starting point when looking for companies with a competitive edge that can deliver performance consistently

The caveat is that differentiating between correlation and causality can be difficult given the relatively short history of datasets.8 Yet even if it simply correlates to a proven lower cost of capital, a high ESG score can be a useful starting point when looking for companies with a competitive edge that can deliver performance consistently.9 10

A high ESG score can also indicate a company’s resilience to disruption, as firms with the highest ESG scores will typically focus on the resilience and sustainability of their business models. Taking supply-chain management as an example, these companies understand their suppliers well, from their carbon footprint to labour practices. This will have left them better prepared than most for the disruption unleashed by COVID-19.11

However, it is often more complicated than just relying on an external rating, which only shows part of the picture. Family-run companies tend to have board structures that don’t fit with best practice; however, getting to know these firms can separate those where cronyism is bad for business from those where management cares passionately about doing the right thing for their business. In the latter case, the lower-rated governance structure can be part of a positive case for investment.12

The fact remains a high absolute score or positive analysis is only a starting point, and investors also need to take relative performance into account. ESG is a continually evolving area, so while snapshots are useful, accounting for its dynamic nature is crucial. A timely judgment on a company’s ESG momentum can identify material risks that may be mispriced.13

These risks tend to evolve slowly but materialise abruptly. As investors have come to realise this, ESG has gained importance, even in short-term investments. According to Fitch Ratings, ESG money-market flows in the US grabbed the lion’s share of growth in 2019.14

Taking a long-term view remains the key consideration for investors in equities and bonds

While this shows the urgency of integrating ESG into investment decisions, taking a long-term view remains the key consideration for investors in equities and bonds. Short-term thinking leads to sub-optimal outcomes, as Paul Polman indicated when he removed quarterly guidance after taking over as Unilever’s chief executive, telling the market he had no interest in talking to short-term shareholders.15

Another source of tension in the debate on absolute versus relative sustainability highlights the importance of digging deeper than the sector level. For instance, Union Pacific has a relatively low MSCI ESG score of 5.2 despite operating in a low-carbon sector – rail freight, where greenhouse gas emissions are 75 per cent lower than road freight. Aviva Investors’ research in July 2020 found recurring incidences of alleged discrimination and weakened performance in key safety metrics had weighed on the company’s ESG rating.16

Practical tension: Exclusion versus engagement

If there was ever a silver bullet for ESG investing, one could argue green bonds should have been it. Unfortunately, they have failed to attract the support that could have been expected given their potential benefits. Key stakeholders have pointed to flaws in the system, with large allocators like Japan’s Government Pension Investment Fund saying the asset class would be just a “passing fad” without necessary reforms.17

The most popular implementation of sustainable investment policies involves setting exclusion filters

Until green bonds up their game, by far the most popular implementation of sustainable investment policies involves setting exclusion filters, which apply to over 20 per cent of globally managed assets.18 However, exclusions present many practical challenges; chief among them is that investors sacrifice the ability to engage and the opportunity to influence companies to improve their practices.

Some choices are obvious. Tobacco has a negative impact on 14 of the 17 Sustainable Development Goals. With eight million fatalities a year, it remains the greatest cause of preventable death globally,19 not to mention having other consequences like ocean pollution: cigarette filters are the number one source of ocean plastic.20

In our sustainable strategies, we have taken a hard line on tobacco, but also coal and weapons. In some funds, we exclude the world’s largest renewable energy provider – NextEra Energy – because it still derives more than 10 per cent of its revenues from coal-power generation. On the other hand, we do not systematically exclude fast-food companies or airlines.

In most sectors, exclusion considerations must be balanced against the positives of taking an active ownership role, where investors can take a view on a name-by-name basis and influence company practices through engagement, holding management teams accountable and challenging bad behaviour.21

Having the collective power to cast thousands of proxy votes allows investors to be a force for change

Stewardship is key and having the collective power to cast thousands of proxy votes allows investors to be a force for change. There have been significant wins – BP setting out its path to net zero emissions being the prime example in recent months – but getting resolutions passed is only the start. Continued monitoring is resource-intensive and requires buy-in and persistence from all analysts, fund managers, executives and shareholders.22

The structure of some asset classes makes it more difficult to engage. Much like corporations, countries need to finance their budgets and rely heavily on capital markets. Thankfully, sovereign bondholders do not get a vote in electing public officials, no matter how large their stake. However, countries that engage and implement more sustainable laws and policies tend to benefit from a lower cost of debt over time, which ultimately profits their citizens.23

The temptation when dealing with complex issues like ESG is to debate the topic to death without ever taking action; in other words, greenwashing. In fact, embracing these complexities to harness the strengths of contrasting approaches can transcend lines of tension to create better outcomes for societies, the environment and investors.


  1. Euan Munro, ‘A Matter of trust’, Aviva Investors, November 14, 2016
  2. Marte Borhaug, ‘The moral philosopher's curse’, Aviva Investors, October 25, 2019
  3. Johan Falk et al., ‘Exponential climate action roadmap’, Exponentialroadmap.org and Global Climate Action Summit, September 2018
  4. Nathan Leclercq, ‘Held to account: Fixing the auditors’, Aviva Investors, April 12, 2019
  5. ‘Climate data: Seeing through the fog’, Aviva Investors, February 28, 2020
  6. ‘Ethics and alpha,’ Aviva Investors, November 7, 2018
  7. ‘The ABCs of ESG’, Bank of America Merrill Lynch research note, September 10, 2018
  8. Harvey C, Liu Y, Zhu C, ‘...and the cross-section of expected returns’, Review of Financial Studies, Vol. 29, No. 1, PP 5-68, January 2016
  9. Friede G, Busch T, Bassen A, ‘ESG and financial performance: aggregated evidence from more than 2000 empirical studies’, Journal of Sustainable Finance & Investment, 2015
  10. ‘Sustainable investing and bond returns’, Barclays research study, November 1, 2016
  11. ‘Roll of the dice: Risk and resilience in an age of uncertainty’, Aviva Investors, July 21, 2020
  12. Anthony Luzio, ‘Aviva’s Parkinson: Why I’m “bemused” by the fuss around ESG’, Trustnet, July 24, 2020
  13. ‘The evolution of ESG: More than just a risk mitigator’, Aviva Investors, July 21, 2020
  14. ‘ESG: Long-term thinking can add value to short-term investments’, Aviva Investors, May 1, 2020
  15. ‘Cwtch: Has capitalism gone cuddly?’, Aviva Investors, February 18, 2020
  16. ‘Global industrial sector review: Transportation’, Aviva Investors, July 2020
  17. Colin Purdie, ‘Three steps that would take green bonds mainstream’, Financial News, September 3, 2019
  18. Source: Global Sustainable Investment Alliance, 2016.
  19. ‘Tobacco NMH factsheet’, World Health Organisation, June 2019
  20. Tik Root, ‘Cigarette butts are toxic plastic pollution. Should they be banned?’, National Geographic, August 12, 2019
  21. David Cumming, ‘Investors must hold bad bosses to account’, The Sunday Times, August 25, 2019
  22. Sora Utzinger, ‘BP vote demonstrates power of engagement’, Aviva Investors, June 28, 2019
  23. Anton Kerkenezov, Carmen Altenkirch, ‘Sovereign interests: ESG matters in emerging market debt’, Aviva Investors, May 31, 2019


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