At Aviva Investors, we integrate ESG issues across the investment process: from the macro view to a company profile, and from how we see the world to how we view a sovereign, a sector or a company.
Shaping the macro view
Aviva Investors has developed an intra‑departmental approach towards forming forward-looking positions on key political, economic and social trends and expected outcomes. Quarterly meetings of representatives from across the business culminates in the publication of Aviva Investors’ House View, which cascades back through the organisation and helps guide medium to long-term investment positions as well as asset allocation for multi-asset strategies.
The Global Responsible Investment Team (GRI Team) is a key component in this process and ensures that material ESG factors are considered when determining the firm-wide macro outlook. As a result, themes such as the implications of global climate negotiations, populism and nationalism, and governance and social reform across key markets have helped form the base case outlook.
For example, the GRI Team worked with the industrials and technology sector leads to undertake in‑depth research into the implications of automation on economies and sectors. While there are unquestionable benefits of automation in terms of efficiencies and productivity, it is also expected to fundamentally disrupt the traditional labour market, with some experts projecting 50 per cent of existing jobs will come under threat. This will have dramatic implications for social cohesion, inequality, economic growth and political stability. As part of our research we formed a view on the economies, sectors and companies that were likely to be the winners and losers of the automation phenomenon.
Shaping the sovereign view
Aviva Investors’ sovereign debt team has developed a robust analytical model to evaluate the forward looking prospects of sovereign debt issuers. The model is based on an assessment against six key data themes including growth, the monetary and fiscal environment, the current account, and political conditions.
The GRI Team has been instrumental in identifying factors and data inputs to support the assessment of a country’s political condition. Factors that have been fully integrated into the sovereign rating model include measures of corruption control, rule of law, freedom of press, and accountability of government.
The sovereign team also review specific ESG data and analysis on sovereign issuers which are embedded in the risk and valuation framework for government debt securities.
As Geoffroy Lenoir, Head of Euro Sovereign Rates, says: “The assessment of the political environment is a fundamental consideration for sovereign debt and we have been looking at indicators related to corruption and free press for some time. However, we are now increasingly looking at broader environmental and social factors such as carbon emissions and social cohesion when evaluating the long-term stability of a country.”
For example, previously Aviva Investors adopted an approach of giving preference to green bonds when two identical bonds were trading in the market. However, during 2017 we made a strategic decision to pro-actively build our exposure to green and social bonds within our sovereign portfolios. This resulted in Aviva Investors more than doubling its holdings to £744 million by the end of 2017.
A recent example of Aviva Investors’ approach is the purchase of a 10 year sustainability bond issued by the Community of Madrid. Proceeds from the bond issue will be exclusively utilised for affordable housing, health, education, social inclusion and tackling climate change. The investor presentation explicitly connected the intended use of the proceeds to seven of the Sustainable Development Goals. In the coming year the GRI and Sovereign Teams will seek to develop an enhanced framework to allow for a greater level of differentiation between green and social bonds to maximise the positive impact of our capital allocation.
Shaping the sector view
Aviva Investors provides both equity and debt finance to support companies across global markets. Consequently we have fostered an integrated research philosophy and platform to assist in the evaluation of sector specific risks and opportunities. Dedicated research specialists built around six key sectors meet on a quarterly basis to update the industry outlook and share conclusions with fund managers and evaluate portfolio positions.
The GRI Team formally contribute to the sector assessments by leveraging ESG insights from internal and external research, proxy voting records and experience from company engagements. The GRI Team also work with sector leads to develop thematic long-term cross-sector research which is jointly presented to investment teams across the business.
For example, the GRI team contributed to a thematic study and presentation on the future of mobility. Topics addressed included the electrification of vehicles, automated driving and related AI technology, and the impact of shared mobility on future demand dynamics. The presentation reviewed emissions regulations and the fallout from allegations of anti-competitive practices within the German market. Although the technological and regulatory trends are positive from an environmental and social perspective, the near to medium-term disruptive nature of these themes were deemed to be negative for the sector and has resulted in an underweight position across the group.
As Paul Lacoursiere, Global Head of Corporate Research, says: “ESG trends are fundamentally changing industry dynamics, from regulation, and supply chains, to shifting consumer patterns. Understanding these ESG factors allows us to better predict the future prospects of each sector.”
Shaping the company view
Our ESG heat map is our key company specific integration tool. It includes a range of material ESG data and analysis, including our internal governance rating, which is based on our historic voting records. This is available to all investment teams through the Bloomberg platform. The ESG heat map is supplemented by additional fund manager and analyst briefings, provided before company meetings, votes or investment decisions. These briefings draw on our heat map and more detailed independent ESG data and research. We leverage the expertise of the GRI Team, bespoke research commissioned from brokers and research organisations, and additional information from less conventional sources such as NGOs and civil society to build a rich picture of ESG impacts and risks.
The GRI Team meets with equity and fixed income teams in formal weekly, monthly and quarterly meetings to exchange perspectives and insights on individual companies and emerging issues.