In the first of a five-part webcast series on the ins and outs of responsible investing, Aviva Investors examines the driving forces behind this investment revolution.
The investment industry is on the cusp of a transformation. The Covid-19 pandemic demonstrated the importance of a more holistic investment approach that also takes environmental, social and governance (ESG) factors into account.
Apiramy Jeyarajah, head of UK wholesale, explains: ‘[The pandemic] is changing the way our clients want to engage with us, and it’s really impacting the long-term sustainability of our businesses.
‘For us, there’s a massive commercial opportunity here, where the most successful businesses are going to be the ones that are not backward looking but forward looking; the ones that are going to brave the change and seize the opportunity to create a sustainable future for ourselves and for our clients.’
Our polls routinely tell us that the average individual wants to make sure that their money is invested in a way that’s aligned with the future they wish to retire into.’
Her view is echoed by chief responsible investment officer Steve Waygood, who specifically highlights the attitudinal shift among investors: ‘People care. Our polls routinely tell us that the average individual wants to make sure that their money is invested in a way that’s aligned with the future they wish to retire into.’
The case for responsible investments
With climate change and human rights concerns continuing to rise, asset managers need to catch up with increasingly economically and socially conscious consumers. Investing is about more than making money these days – it’s also about improving the living conditions of current and future generations of a wider society.
‘The world is on fire. That isn’t just a metaphor – it’s quite literal,’
‘The world is on fire. That isn’t just a metaphor – it’s quite literal,’ Waygood says. The amount of atmospheric carbon dioxide has jumped from about 250 parts per million (ppm) at the beginning of the industrial revolution to more than 410 ppm today. That increase has doubtlessly caused poverty alleviation and significant improvements of quality of life, but it has also come at a cost.
In line with economic growth and the resulting rise in consumption, the global average surface temperature has warmed about one degree since 1750. The consequences are startling and include rising sea levels, ocean acidification and more extreme weather events.
The solution? For Waygood, it’s all about capitalism: ‘We need to have capitalist economies that are fuelling a transition to the future, and we need to be very clear to people about how our money can help power change.’
‘The financial sector is extremely powerful and can be a force for good,’ Jeyarajah agrees.
But for that to happen, people need to be able to make informed decisions about their investments, she says. In her opinion, it’s about finding ways to empower investors with the right toolkit. Long-term value and transparency are key in that regard.
‘We need to show our clients how their money is ultimately invested and what it is actually financing,’ she says. ‘We need to allow them to understand the ESG footprint in areas such as carbon intensity, water intensity and portfolio temperature. Any individual that puts in money to be invested should have the right to exercise the way in which it is invested.’
ESG has certainly come a long way since it entered the investment mainstream in the early 2000s, but ‘we are still only at the beginning of the journey’.
Breaking up traditional structures and advocating for a positive change can resemble an uphill battle, but it’s one worth fighting. Or, as Jeyarajah puts it: ‘Our planet is too big to fail.’
Three questions with Shane O'Brien, senior investment director
1. What are the most important ESG issues for investors?
Climate or environmental issues seem to resonate the most with investors. Having said that, people have also become more aware of social issues in 2020, be it in the form of civil society movements such as Black Lives Matter and Extinction Rebellion or labour inequalities such as salary imbalances and poor working conditions.
2. How can investors identify the managers who take ESG most seriously?
There are three simple questions you can ask to assess how seriously a fund provider takes ESG issues. The first is how many dedicated ESG professionals do they have within the business? By that I mean people whose full-time job it is to solely focus on ESG research. Second, what do the voting records look like? If a fund manager has a clear policy and acts on it, that will come through in the voting records. Aviva voted against management decisions in the companies we hold 24% of the time in 2020. That’s almost a quarter where we said as a shareholder ‘we don’t quite agree with your line’.
It’s quite powerful – if there’s enough shareholders that voted against a specific resolution, it will change the strategy of the business.
And, finally, how do independent sources rate the managers? Not-for-profit organisations like ShareAction, for example, don’t have any vested interest in any provider. ShareAction works with investment managers like ourselves to press companies to improve. Only five asset managers rated A were in the firm’s 2020 survey – and Aviva was one of them.1
3. What can investors do to influence a company’s behaviour?
A lot of people probably don’t realise that, within their pension, they hold company shares that come with proxy voting rights. It’s the fund manager’s responsibility to use those voting rights. But it’s equally important that people who are invested in these funds understand how their vote is being used. That’s why we are trialling Tumelo, a fintech platform that is exploring the concept of how users can indicate how they would vote on ESG issues.
We will also be distributing monthly engagement stories for our multi-asset strategies. We basically take an example of a company that’s held within our multi-asset strategies and look at what we have done to improve the firm’s overall behaviour. We can talk all we want about optimisation, scoring and all these kinds of funky things, but at the end of the day it’s the stories that people can actually relate to.
This article first appeared in Citywire NMA.
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