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.
Carbon accounting: Measuring what matters
11 Jun 2021
The focus on net-zero targets has intensified scrutiny on measurement and disclosure of greenhouse gas emissions. But carbon accounting is a young art, explains Dr Matthew Brander, senior lecturer at the University of Edinburgh.
Action now! Accelerating litigation to meet climate targets
3 Jun 2021
A landmark legal ruling in the Hague has ordered Royal Dutch Shell to move faster to bring its emissions in line with the Paris Agreement on climate. Thomas Tayler, a trained lawyer and senior manager at Aviva Investors’ Sustainable Finance Centre for Excellence, assesses the fallout.
What does the data say?
What does the data say? Tesla, the halo effect and reasons for CEO departures
28 May 2021
In the latest instalment of our visual series on topical data themes, we look at Tesla’s market cap relative to the European “Big Five” carmakers, the average CSR spending of FTSE 100 companies versus their procurement budget and the most common reasons for a CEO to leave a company.
Carbon credits: Seeing the wood for the trees
20 May 2021
As governments and companies strive to reduce carbon emissions and achieve net zero, questions are being asked about the role of natural climate solutions. We analyse differing approaches to offsetting and their impact on forest management.
Green is not always clean: Rising tide of greenwash brings risks for investors
19 May 2021
Some companies have long sought to mislead the public about their commitments to sustainability, but greenwashing has become more widespread and sophisticated in recent years. Now regulators and investors are fighting back.
Will companies embrace a more inclusive form of capitalism?
18 May 2021
Just before COVID-19, some of the world’s biggest companies pledged to look beyond the pursuit of profit alone to consider the interests of a wider group of stakeholders, including employees and local communities. But are they ready to back up their words with actions?
By the people, for the people: Why investors should care about human rights
17 May 2021
Companies cannot thrive without healthy and happy employees, consumers, and communities. Investors must use their influence with companies and other stakeholders to ensure the basic rights of these groups are respected.
Unlocking carbon capture and storage: An Interview with Stuart Haszeldine
12 May 2021
The professor of carbon capture and storage at the University of Edinburgh discusses why achieving net zero needs multiple technologies and explains the thinking behind the UK’s evolving approach.
Are sustainable bonds the new smartphones?
10 May 2021
The market for sustainable bonds to fund activities that have a positive impact on the environment or society is booming. But there are many factors to consider before investing. Not least among them is a crucial question: is your money really being used to fund the activities promised?
To improve diversity, asset managers should rip up the rulebook on recruitment
21 Apr 2021
For too long, the investment industry has relied on staid recruitment methods that maintain the status quo. By doing things differently, we can improve diversity and future-proof our businesses, says Apiramy Jeyarajah.
Joana Setzer Q&A: On the climate litigation front line
9 Apr 2021
Joana Setzer from the Grantham Research Institute on Climate Change at LSE discusses the implications on governments and companies of the growing wave of climate litigation.
Law and climate disorder: Understanding physical, transition and litigation risk
9 Apr 2021
Major listed companies are finding themselves the target of legal action designed to make them move faster towards a lower carbon world. These cases could mark an inflection point; when the conversation turns toward specific responsibilities to move away from fossil fuels rather than broad commitments to change.
Living in the past: Why are controversy scores so controversial?
8 Apr 2021
Many investors use controversy scores as a filter to avoid firms whose damaging behaviour has hit the headlines, from human rights violations to environmental disasters. But these scores have serious limitations, making them an inadequate tool for investors who want to manage ESG risks and have a positive impact.
Lean on me: How can bond investors influence government climate action?
25 Mar 2021
The coronavirus epidemic has further accelerated the rise of ESG into the investment mainstream. As deficits skyrocket, bond investors have an opportunity to engage with governments on climate change, argues Thomas Dillon.
Building a better world after COVID-19
18 Mar 2021
There is a growing consensus among companies, governments and electorates across the globe that the world after the pandemic should be greener. But how should we go about this?
Podcast: A clear green premium
18 Mar 2021
Our Head of ESG, Ed Dixon, recently joined Blackstock Consulting on a PropCast episode to launch their new series of ESG insights with industry leaders. Together, they discussed how the government needs to be partnering with businesses to reach their climate pledges, how the “green premium” is yielding higher rents for eco-friendly offices, and much more.