As a key part of our engagement efforts, every January we send a letter to the chairs of companies we invest in (and some we don’t, but still want to use our influence with) to set out our stewardship priorities for the year. Here, in full, is our 2022 letter.
Read this article to understand:
- Aviva Investors’ stewardship priorities for 2022 and our expectations of investee companies
- Why we believe companies most likely to outperform are those that mitigate their environmental impacts and invest in their people, customers, suppliers and communities
- Our commitment to hold company boards and directors accountable where progress does not reflect the urgency required
Aviva Investors is committed to help create a more sustainable, inclusive and low-carbon future for our clients and wider society, while supporting Aviva Plc to become a net zero company by 2040.
As a global asset manager with over £260 billion of assets under management, the most meaningful and direct impact we can achieve comes from our commitment to fully integrate environmental, social and governance factors across investment strategies, and the targeting of ‘real world’ positive outcomes for the betterment of people, the planet and the climate.
We deliver on these objectives by investing in companies aligned with Aviva’s sustainability ambitions. This includes supporting businesses engaged in developing sustainability solutions, those that maintain the highest standards of sustainability practices, and those on a journey of transition and improvement.
As the interests of investors and wider stakeholders are aligned over the long term, we will invest in companies that mitigate their environmental impacts while investing in their people, customers, suppliers and communities with a view to delivering sustainable long-term returns.
You will be reflecting on your own sustainability strategy and objectives for the coming year. It is in this context that we want to share the four key stewardship priorities that will shape our voting and engagement activities in 2022:
- Climate change
- Human rights
- Executive pay
1. Climate change
We welcomed the developments and pledges made at COP26 in Glasgow; these strengthened commitments are now more closely aligned to a two degrees trajectory. However, as with all long-term objectives, focus must quickly turn to delivery.
We expect all companies to work towards achieving SBTi validation of their climate targets and plans
We are strong supporters of the Science-Based Targets Initiative ("SBTi")1 and expect all companies to work towards achieving SBTi validation of their climate targets and plans.
Beyond that, we will focus on two key areas in the coming year that will be instrumental in helping investors understand and support your business as you embark on your net-zero climate journey: transition plans and climate accounting.
We expect all businesses to develop climate transition plans, and companies in higher-impact sectors should present these for shareholder approval. In developing transition plans, we recommend companies comply with the six guiding principles outlined by the CDP Framework.2 The key elements should include the following:
- 2050 or earlier net-zero objectives augmented with interim targets aligned with the need to at least halve absolute global greenhouse emissions by 2030. Targets must be set for Scope 1, 2 and 3 emissions
- Net-zero objectives should be fully integrated in the broader corporate strategy, demonstrating how the business will fund the necessary investments in the transition while remaining commercially viable during the interim period. We expect companies to ensure ‘just transition’ considerations are included in the plan
- Quantifiable and verifiable performance indicators to enable objective monitoring of companies’ progress
- Key risks and dependencies that may impact the successful execution of the plan, including companies’ reliance on technologies, offsets and regulation
Robust integration of climate risks and opportunities into fundamental valuations requires high-quality and consistent financial reporting. We welcome the publication of the IFRS Climate-Related Disclosure Prototype3 and encourage companies to voluntarily report against this standard as soon as practical. We recognise the standard is still to be fully developed and would support a phased approach to reporting with full compliance by 2024. Key disclosures against the standard include:
- Absolute Scope 1, 2 and 3 emissions, expressed in accordance with the Greenhouse Gas Protocol, alongside emissions intensity data
- Assets and/or business activities vulnerable to transition and physical risks
- Revenues, assets and other business activities aligned with climate-related opportunities
- Capital expenditure and investments deployed towards climate-related risks and opportunities
- Internal carbon price used for business and investment decisions
We expect climate reporting and related risk assurance to be included within the annual audit plan of the external auditors.
Since 1970, there has been an average fall in global wildlife populations of 68 per cent, mostly due to human-driven habitat loss, pollution and climate change.4 This is of serious concern as ecosystem services provided by the natural world underpin our economies and societies and will increasingly become an important driver of company valuations. More than half of global GDP – around $44 trillion - is reliant on biodiversity and our ecosystems.5
We expect all companies to develop biodiversity action plans
We expect all companies to develop biodiversity action plans, taking into account emerging best-practice guidance frameworks, such as the Science Based Target Network (SBTN) for Nature,6 the Task Force on Nature-related Financial Disclosures (TNFD)7 as well as the conclusions of the CBD COP process.8 Key elements should include the following:
- Assessment of business dependencies and impact upon nature, identifying key issue areas and locations in the value chain for target setting
- Interim SBTN-aligned targets where methodologies already exist and are relevant for your business (e.g., land use, freshwater use and ecosystem integrity)9
- Comprehensive targets aligned with the SBTN framework once guidance is finalised (this should include the full value chain within scope)
- Public reporting of performance against targets
3. Human rights
Companies’ impact on people has rightly gained more attention over the last two years, particularly with respect to the treatment of workers during the COVID-19 pandemic and businesses’ responsibilities towards creating a fairer and more inclusive society.
All social programmes need to be built upon the principle of do no harm
While the challenges are multi-faceted and complex, all social programmes need to be built upon the principle of ‘do no harm’ and the responsibility to respect internationally agreed human rights, as enshrined in the United Nations Guiding Principles on Business and Human Rights.10
We expect all companies to publicly state their commitment to human rights and implement the following:
- Human rights due diligence – identifying and assessing the actual and potential human rights risks and impacts of their business activities. The scope of due diligence activities should extend through the value chain
- Mitigation and remediation of actual and potential risks and impacts. This must include appropriate independent grievance mechanisms for affected stakeholders
- Tracking and reviewing performance of mitigation and remediation efforts, integrating lessons learnt to continuously improve internal due diligence processes
- Public reporting of salient human rights issues, actions and targets, including evidence of engagement with affected stakeholders and remediation action taken
4. Executive pay
Achieving these environmental and social goals requires all empowered stakeholders to be fully aligned and committed to their delivery.
Executive compensation structures and performance targets should reflect sustainability goals
It is therefore essential that executive compensation structures and performance targets meaningfully reflect sustainability goals, particularly where management are required to take actions that are a significant departure from the business-as-usual environment.
As such, we expect remuneration committees to ensure the following:
- Variable compensation plans include robust, stretching and externally validated sustainability targets that are clearly linked to the commercial strategy
- Existing bonus and long-term targets that are fundamentally at odds with sustainability commitments should be retired
- Total expected pay outcomes should not be inflated due to the inclusion of additional sustainability performance metrics
We acknowledge the magnitude of many of these challenges and will evaluate companies on the strength of their commitments and their ability to demonstrate progress over time. However, we will hold boards and individual directors accountable where the pace of change does not reflect the urgency required.
Our 2022 Global Voting Policy provides more details on our approach and perspectives on governance best practice and is available on our website, www.avivainvestors.com. We welcome any feedback on the issues highlighted and our general stewardship approach. Please contact our responsible investment team at Stewardship@avivainvestors.com.
Chief Executive Officer