Facing up to the ESG backlash

Asset managers appear to be placing greater emphasis on environmental, social and governance (how companies are managed) factors as part of their investment decision making. Yet recent months have seen growing criticism of the focus on ESG (as it is known), with critics dismissing it as a worthless vanity exercise.

Some commentators have cited Russia’s invasion of Ukraine as ‘evidence’ investors have mistakenly turned away from fossil fuels on ESG grounds and are ‘too focused on climate change’.

However, we were among a number of asset managers that had limited exposure to Russia going into the crisis largely as a result of ESG concerns.

If anything, Russia’s invasion highlights the urgent need to accelerate the transition to green, renewable energy so we are not dependent on supplies from hostile and unpredictable regimes. We must decide what kind of world we want to live in and take strategic actions to build it. That will be difficult, requires sacrifice, and comes with short-term criticism.

Going back to coal in the face of the threat posed by climate change to the planet (and therefore companies and countries) does not make for grown-up, strategic thinking. 

Critical to investment success

ESG is not a fad; it is an investment belief. Companies, and indeed governments, that conduct their business in a respectful way, with an eye on the long-term, are more likely to succeed over time. Bad practices don’t just hit the headlines, they hit profits as well.

As such, integrating ESG into our investment process is non-negotiable. Understanding these issues allows us to spot and manage investment risks, as well as capture opportunities. Regulation is also directing money towards more sustainable investments.  

Asset managers must do a better job in defining and explaining ESG and their actions in this area. At Aviva Investors, we’ve been using our influence and voice – sometimes very loudly – to influence the behaviour of companies we invest in for five decades with positive outcomes for those businesses as well as the wider economy and society.

ESG considerations help us assess the risks and opportunities associated with investments. This process provides essential information to portfolio managers to inform their decisions and drive better financial outcomes.

Including ESG in the investment process does not mean excluding certain sectors. Indeed, it can identify opportunities to turn ‘brown’, or polluting companies, into ‘green’ businesses by investing in and influencing them.

Of course, there are times when we exclude investments at a business, fund or stock level and these decisions are driven by our view of what is the right thing to do.

Currently, it can be hard for investors to differentiate between different ‘sustainable’ funds offered by asset managers. Customers need clear labelling, and UK regulators can help achieve this with their own classifications, something the industry is collaborating on to encourage. A huge amount of education will then be required to ensure customers truly understand the products they are investing in.

It is up to asset managers to define exactly and clearly their values, priorities and red lines, and how these are embedded within their offerings. Clients can then choose managers whose philosophy, approach and products most closely align with their own views.

Three points to remember

• Criticism that asset managers are focusing too much on ESG factors when making investment decisions is misguided
• Focusing on these issues can be a key driver of investment returns and improve company behaviour with positive effects on the economy and society
• Improved labelling of funds and education will be required to ensure customers truly understand the products they are investing in