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.
The investment implications of peak fossil fuels
24 Mar 2023
Energy analyst Kingsmill Bond considers if peak fossil-fuel consumption has been reached and whether investors appreciate the implications.
Integrating ESG in multi-strategy portfolios
23 Mar 2023
Multi-strategy portfolios have come a long way in embedding ESG into the investment process, but there are gaps to fill, as Jennie Byun explains.
Climate adaptation and resilience: Preparing for a warmer, wilder world
22 Mar 2023
Millions of hours have been spent negotiating net-zero targets, but many human-led climate impacts are already locked in. Our credit and equities portfolio managers explain where they see opportunities in solutions providers that will help society adapt for the new reality.
All change: Positioning for a new market regime and climate action in IG credit
17 Mar 2023
Justine Vroman and Tom Chinery discuss the opportunities in investment-grade credit to drive climate action.
Engaging on neurodiversity: What can be learned from other DE&I initiatives
10 Mar 2023
Many diversity, equity and inclusion initiatives have seen improvements in recent years, but neurodiversity has not progressed at the same pace. Abigail Herron explores what can be applied from other successful DE&I campaigns to put neurodiversity firmly in the spotlight.
Gas versus renewables: Does natural gas have a future?
8 Mar 2023
The war in Ukraine has thrown up huge uncertainties around the role of gas in the energy system. Experts from our credit, ESG and real assets teams discuss the implications for traditional energy and renewables companies.
To build or not to build, that is the question: Decarbonising the built environment
28 Feb 2023
We assess the financial and environmental pros and cons of developing new buildings versus retrofitting old ones.
Pragmatism, policy and pace: An interview with Julie Hirigoyen
20 Feb 2023
The chief executive of the UK Green Building Council sets out her blueprint for a net-zero-aligned property and construction industry. Words by Miles Costello.
The economics of renewables: Challenges and solutions
10 Feb 2023
Meeting 2050 net-zero targets will require adding renewable energy capacity at scale and speed. Can it make financial sense, or will we need to rely on our commitment to do the right thing?
Our annual letter to company chairpersons
6 Feb 2023
Every January, we send a letter to the chairs of companies we invest in (and some we don’t, but still want to influence) to set out our stewardship priorities for the year. Here, in full, is our 2023 letter.
Why infrastructure investors better beat beta: End of cheap-money era brings risks and opportunities
25 Jan 2023
Benign macroeconomic conditions have boosted infrastructure investments over the past decade. But with higher interest rates, investors in the asset class will have to show they can create true value, says Darryl Murphy.
Charging up: Batteries and the fight against climate change
5 Jan 2023
Batteries are set to play a crucial role in helping to decarbonise the global transport and energy sectors. As capital floods into an industry experiencing exponential growth, we look at the key considerations for investors.
What does the data say?
What does the data say? Reflections on COP27
14 Dec 2022
In this month’s instalment of our visual series on topical themes, we look at climate in the aftermath of November’s COP27 event in Egypt.
Building to net zero: The outlook for climate transition real assets
8 Dec 2022
James Tarry and Luke Layfield explore how the accelerating climate transition is creating risks and opportunities for real assets investors.
Confronting a permacrisis? The intersection between antimicrobial resistance, climate change and biodiversity loss
23 Nov 2022
Will a warmer and less biodiverse world give pathogens new opportunities, and do we have the tools to confront disease? This report discusses the complex intersection of three planetary crises and calls for urgent action to slow resistance to antimicrobial drugs – an obvious public health emergency.
Building better: Investing in the climate transition through real assets
15 Nov 2022
Investors in real assets can propel the transition to a more sustainable future while also benefiting from portfolio diversification and attractive returns, says Mark Meiklejon.