The results of the recent European elections, in which Green politicians made a surprisingly strong showing, were just the latest indication that Europeans’ attitudes to environmental issues are shifting.
3 minute read
A poll from the Pew Research Centre earlier this year found climate change was now seen as the top global threat in most European countries, trumping even the danger of ISIS-related terrorism. It will no longer be possible to conduct the suitability assessment without ESG being part of the conversation.
That would suggest environmental, social and governance (ESG) criteria, which have been gaining traction within mainstream institutional investing in Europe, have the potential to start shaping the retail investment landscape to a much bigger extent too. If this is to happen, regulatory changes which are about to be introduced by the European Commission could have a crucial role to play.
Surveys suggest most retail investors want to ensure their values are reflected in the way their money is invested. Unfortunately, at present this happens all too rarely. That is primarily because so few financial advisers ask clients whether they have any ESG preferences, let alone whether they would like them to be reflected in the advice they receive or what their portfolio is invested in. Paradoxically, it appears advisers don’t ask about their clients’ ESG preferences because they are not mentioned by them, but the clients don’t mention any ESG preferences because the adviser hasn’t asked about them. The European Commission is looking to address this ludicrous situation by introducing legislation that would mean understanding a client’s ESG preferences would be weaved throughout the fabric of the suitability assessment carried out by advisors.
When enacted, the legislation will ensure they have to ask their clients about any ESG preferences and integrate them into the investment advice they provide. For example, advisors would need to reference any ESG preferences when explaining how they have reached their investment conclusions and when describing the nature and risk of their proposed course of action. Moreover, firms’ policies and procedures will need to be updated so they can demonstrate they understand their clients’ ESG preferences.
In other words, it will no longer be possible to conduct the suitability assessment without ESG being part of the conversation. Clients may not have such preferences of course, or they may put other elements of their objectives higher on their list of priorities. But at least they will be asked. We warmly welcome these proposals and believe the EU Commission deserves enormous credit. Having said that, we believe it needs to make sure it gets the detail of the legislation right if it is to ensure clients are given the broadest range of options, in line with their preferences.
At present, the draft legislation defines ESG preferences as “a client’s or potential client’s choice as to whether and which environmentally sustainable investments, social investments or good governance investments should be integrated into his or her investment strategy”. Sustainable investments are in turn narrowly defined as an investment in an economic activity that contributes to an environmental objective.
The legislation as currently drafted assumes all clients with ESG preferences are exclusively interested in increasing the exposure of their portfolio to economic activities that contribute to an environmental or social objective, subject to good governance and doing no harm to those objectives.
We believe while the definition of sustainable investments may accord with some people’s ESG preferences, there is a much wider spectrum of preferences that the suitability test needs to take account of. For example, we would like to see it encompass a whole range of sustainable investment approaches including negative screening, stewardship, and impact investments. Moreover, we believe investors want to see what impact their investment strategy is having in the real world.
Research suggests most clients with ESG preferences want to use their influence to favour positive outcomes in the real economy – such as changes in the investment decisions made by the investee companies – and expect evidence regarding the effectiveness of the investment techniques used. In our opinion, the definition of ESG preferences should be client-led, with the assistance of advisers or tools to outline the possible options and explain what they mean for clients, not pre-determined by a narrower version of what sustainable investment might mean.
There is no shortage of evidence that ESG factors, particularly relating to climate change, are important to members of society, particularly millennials. Furthermore, many of these people wish to see their values reflected in the companies they spend their money with and that they entrust their money to. Too few members of society understand how the financial system works and realise that through their pension and investments they are the ultimate shareholders of companies that affect every aspect of our day-to-day lives. This is their money.
Although financial advisers play a key role in helping them meet their investment objectives, for too long retail clients have not even known it was possible to invest in a way that reflected their values, let alone been given an opportunity to do so. Making sure clients are asked the question about their ESG preferences and can have a conversation about how they want their money to be used, should go a long way towards improving matters.
This article originally appeared on Responsible Investor.
Want more content like this?
Sign up to receive our AIQ thought leadership content.
Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL) as at 8 August 2019. 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. This material is not a recommendation to sell or purchase any investment.
In the UK & Europe, this material has been prepared and issued by AIGSL, registered in England No.1151805. Registered Office: St. Helen’s, 1 Undershaft, London, EC3P 3DQ. Authorised and regulated in the UK by the Financial Conduct Authority. In France, Aviva Investors France is a portfolio management company approved by the French Authority “Autorité des Marchés Financiers”, under n° GP 97-114, a limited liability company with Board of Directors and Supervisory Board, having a share capital of 17 793 700 euros, whose registered office is located at 14 rue Roquépine, 75008 Paris and registered in the Paris Company Register under n° 335 133 229. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH, authorised by FINMA as a distributor of collective investment schemes.
In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. 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: 1 Raffles Quay, #27-13 South Tower, Singapore 048583. In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 30, Collins Place, 35 Collins Street, Melbourne, Vic 3000, Australia.
The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom. Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is registered with the Ontario Securities Commission (“OSC”) as a Portfolio Manager, an Exempt Market Dealer, and a Commodity Trading Manager. Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) and commodity pool operator (“CPO”) registered with the Commodity Futures Trading Commission (“CFTC”), and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.
Our annual letter to company chairpersons
24 Jan 2022
As a key part of our engagement efforts, every January we send a letter to the chairs of companies we invest in (and some we don’t, but still want to use our influence with) to set out our stewardship priorities for the year. Here, in full, is our 2022 letter.
Race, ethnicity and investing: Where are we now?
20 Jan 2022
In late 2020, AIQ spoke to Aviva Investors’ senior management about institutional racism and the continued under-representation of black people in finance. They outlined a series of key actions, to improve in-house diversity and inclusion and our engagement with investee companies. A little more than a year on, we explore areas of progress, where more needs to be done, and plans for 2022 and beyond.
Nature shock: Grappling with nature-based risk
19 Jan 2022
Could nature degradation prove a significant threat to corporate and financial stability? As climate change accelerates, oceans acidify, deforestation and soil erosion continue and species are lost, this important question is weighing on investors and financial regulators around the world.
The AIQ Podcast: Embracing neurodiversity at work
12 Jan 2022
Employers have considerable room for improvement when it comes to the working experience for neurodivergent individuals. But a little more understanding and some fairly simple adjustments could make a world of difference.
Investing for climate action: Easy as SBTs?
11 Jan 2022
With governments struggling to turn words into action on climate change, investors can ensure the private sector plays its part by pushing firms to adopt science-based targets, argues Rick Stathers.
Lessons from tech and military: Why asset managers need to be agile to stay effective and relevant
22 Dec 2021
Asset managers must promote diversity of thought if they are to future-proof their businesses and provide clients with great service. They can learn valuable lessons on how to do this from tech companies, military leaders and ancient philosophers, writes Apiramy Jeyarajah, head of UK wholesale at Aviva Investors.
A tough job: Decarbonising heavy industry
20 Dec 2021
Heavy industry and heavy-duty transport are responsible for nearly a third of global carbon dioxide emissions. While reducing emissions from these sectors will be difficult, the transformation will create opportunities for investors.
The social transition: Investing for a more equitable world
14 Dec 2021
Recognising that being a good corporate citizen is the right thing to do and pays off is something investors and the financial community need to think harder about, argue Vaidehee Sachdev and Matt Kirby.
Where the wild things are: Why investors should care about natural capital
14 Dec 2021
Finance must wake up to the risks associated with biodiversity loss and the opportunities that arise from nature-friendly solutions, argue Eugenie Mathieu, Julie Zhuang and Jonathan Toub.
No more lip-service on diversity and inclusion – three principles for financial institutions to follow
13 Dec 2021
In part two of our series on intersectionality, Apiramy Jeyarajah, head of UK wholesale at Aviva Investors, and Mitesh Sheth, outgoing CEO of Redington, explain what investment organisations can do to maximise the return on their most important assets – their people.
Waste not, want not: An investor’s guide to the circular economy
10 Dec 2021
Using the examples of electronics, food, autos and fashion, we explore the benefits of, and challenges to achieving, a more circular economy.
Restoring and caring for the natural world: An interview with John Willis
9 Dec 2021
Scientists around the world have highlighted the need to tread more lightly on the planet, halting then reversing the decline of the natural world. But the financial community, including investors, has been slow to respond.
The future of pharma: Increased returns or the age of biotech?
8 Dec 2021
After decades of low returns on research and development (R&D), the healthcare sector is producing a slew of innovations, from drugs to diagnostics. But with many coming from new entrants, will big pharmaceutical companies manage to keep up with the times?
The cost of climate change: A big threat to sovereign debt?
3 Dec 2021
Governments around the world are struggling to avert a climate catastrophe. Regardless of whether they succeed, climate change threatens adverse consequences for government bonds, although market impacts are likely to vary.
Thinking outside the box: Embracing neurodiversity at work
30 Nov 2021
Enabling neuroinclusion in the workplace still has a long way to go, although better understanding and simple adjustments could make a world of difference.
What does the data say? Parcels, the (other) Amazon and COVID-19
26 Nov 2021
In this month’s instalment of our visual series on topical data themes, we look at the steep increase in deliveries, the continued deforestation of the Amazon rainforest and the rise of COVID-19 in Europe.