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.
Important Information
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.
Related views

Responsible Investing
Investing in a just transition to net zero: A Q&A with Nick Robins
30 Jun 2022
Reaching net zero by 2050 will require significant injections of capital. But it is also an opportunity to rethink social relationships, as Professor Nick Robins explains.
Read more

Equities
Supply chains, painkillers and gene editing: ESG risks in pharma
29 Jun 2022
Reflecting on ESG risks in the pharmaceutical industry, Sora Utzinger discusses supply chains and counterfeit medicines, access to painkillers, and the ethics of gene editing.
Read more

Responsible Investing
What does the data say? Biodiversity loss: From horror to hope
24 Jun 2022
In this month’s instalment of our visual series on topical themes, we explore the world of biodiversity.
Read more

Responsible Investing
ESG investing: Lasting lessons from Russia’s war on Ukraine
23 Jun 2022
Russia’s invasion of Ukraine has led to ESG receiving widespread flak. While much of the criticism is unjustified, the episode underlines how many issues related to ESG are complex and involve trade-offs. Investment approaches may need fine tuning, especially if the geopolitical landscape continues to change so rapidly.
Read more

Responsible Investing
Antimicrobial resistance: Q&A with Dame Sally Davies
10 Jun 2022
Resistance to antibiotics is already killing millions. Professor Dame Sally Davies, UK Special Envoy on Antimicrobial Resistance, spoke to AIQ on the latest developments to counter antimicrobial resistance Antimicrobial Resistance (AMR) in the UK and globally.
Read more

Responsible Investing
The AIQ Podcast: Investing towards a new social contract
9 Jun 2022
As life returns to some form of normality, governments are free to move their focus from COVID-19 to left-behind communities and delivering a just transition. This is important to secure long-term economic outcomes, but also comes with investment opportunities and risks.
Read more

Responsible Investing
Deep water: Ten threats to marine ecosystems
8 Jun 2022
Our air, weather, food, the health of diverse marine life and millions of jobs all depend on the ocean. But we have not done well as custodians of marine ecosystems. Here, we set out ten ways where human actions threaten the health of an essential environment.
Read more

AIQ Feature
Levelling up: Investing towards a new social contract
17 May 2022
As we learn to live with COVID-19, focus is returning to delivering a just transition. This is important to secure long-term investment outcomes, but also presents direct opportunities.
Read more

Equities
Life force: Why nature matters
12 May 2022
Growing awareness that natural systems are stressed or even close to breakdown is prompting asset managers to look closely at nature-based risks and investee companies to understand their environmental impacts and dependencies.
Read more

Equities
Why investors must act now on the biodiversity crisis
26 Apr 2022
The concepts of biodiversity and ‘natural capital’ have been largely ignored by business and finance until recently. Investors are now starting to take the issue seriously and build it into their thinking.
Read more

Responsible Investing
Disney’s tales of diversity: Creative lessons on developing and identifying talent
13 Apr 2022
Middle managers need to up their diversity, equity and inclusion game. They must think harder about roles models, succession planning, psychological safety and team dynamics to harness untapped human potential, explains Apiramy Jeyarajah.
Read more

Responsible Investing
The challenge of delivering net zero
11 Apr 2022
Financial services businesses have begun the complex businesses of working out how to deliver on their net-zero ambitions and play their part in tackling climate change.
Read more

Responsible Investing
Facing up to the ESG backlash
6 Apr 2022
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.
Read more

Equities
Back to nature: Why we must act now on the biodiversity crisis
31 Mar 2022
In an age of mass extinctions, policymakers, businesses and financial institutions are beginning to acknowledge the risks associated with biodiversity loss, along with the opportunities that arise from nature-positive solutions.
Read more

AIQ Feature
Power to the people: The moral and investment case for human rights
30 Mar 2022
Healthy and happy employees, consumers, and communities are all critical ingredients in a company’s long-term success. Investors have a key responsibility in ensuring the rights of these groups are respected.
Read more

Fixed income
Now for the hard part…..The challenge of delivering net zero
29 Mar 2022
More than one fifth of the world’s largest listed companies have committed to net-zero targets, but few have detailed roadmaps to get there. Mirza Baig considers the challenges for investors managing transition pathways.
Read more