Mark Versey goes on the offensive to dispel recent criticisms against ESG investing.

Read this article to understand:

  • The differences between ESG integration, ethical investing and sustainability
  • Exactly how ESG integration allows asset managers to spot and manage investment risks and capture opportunities
  • Why clear labelling of terminology and products has a key part to play
‘Inconsistent.’ ‘Inflexible’. ‘Saintly’. ‘Woke’. ‘A movement blighted by hype and woolliness

In recent months it has been hard to ignore the growing cynicism towards ESG. Yet while criticism of the disproportionate claims made by some asset managers about their responsible investment credentials is warranted, condemning ESG in broader terms as a worthless vanity exercise shows a lack of understanding of what it is and there to achieve.

Too often, ESG has been used as a generic catch-all position, lumped together with ethical investing, stewardship or sustainability: they are, of course, linked but are not the same thing and shouldn’t be portrayed as such.

Some commentators have cited Russia’s invasion of Ukraine as ‘evidence’ investors have mistakenly turned away from fossil fuels on ESG grounds

In the latest example of ‘wise after the event’ disapproval, 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’.

There are a couple of points to make here. First, we were among a number of asset managers that had limited exposure to Russia going into the crisis (in our case less than 0.1 per cent of AUM). Our negative view was largely driven by ESG considerations, which are a core input in our investment process.

Second, Russia’s invasion only highlights the urgent need to accelerate the energy transition, so we are not dependent on supplies from hostile and unpredictable regimes. We must form a principles-based view of what kind of world we want to live in and take strategic actions to build it. In doing so, we recognise fundamental system-wide change is hard, requires sacrifice, and we have to accept the short-term criticism that comes with it.

Defaulting to pragmatic positions based on how the winds are blowing today means, by definition, tying ourselves to the status quo. Reverting back to coal, for example, in the face of the biggest systemic threat to the planet (and therefore companies and countries) does not constitute grown-up strategic thinking. 

That anyone can dismiss ESG as a vanity exercise is as mystifying as it is disconcerting. Investing responsibly is not a fad; it is an investment belief. Companies, and indeed governments, that conduct their business in a respectful and sustainable way are more likely to succeed in the long term. Bad practices don’t just hit the headlines, they hit the bottom line as well. It is that simple.

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.

We should also not lose sight of the fact regulation is rightly pushing capital towards more sustainable investments, or the many reasons why clients large and small want and need to invest more sustainably – not least to avoid the potential losses from holding stranded assets that will not be part of more sustainable economies.  

They must be clearer about what ESG is and what it isn’t

Where we do need to do a better job is in being crystal clear in our communications when we talk about ESG, especially in explaining the nuances. Asset managers’ approaches to ESG are relative, subjective and non-binary – they are not objective and singular.

Being responsible stewards of our clients’ assets is how we can differentiate – especially when we move into ESG activism. Through our active ESG engagement programme, we believe we can be a force for positive change in the companies we invest in, economies and societies. We’ve been using our influence and voice – sometimes very loudly – in this way for five decades.

ESG integration is purely investment orientated: it assesses the risks and opportunities associated with various ESG factors and embeds them in the investment process alongside financial analysis. It is pragmatic and appropriate for all clients and strategies, providing essential information to portfolio managers to inform their decisions and drive better financial outcomes.

ESG integration does not, as some misinformed commentators have it, mean blanket exclusions from certain sectors, particularly those subject to external scrutiny. On the contrary, ESG analysis is often the critical input in deciding whether we have an opportunity to turn ‘brown’ assets ‘green’.

When we are successful in doing this, we believe it can add value to most investments, irrespective of asset class, whether that is pushing energy companies to move more quickly and decisively in transitioning to renewables; refurbishing older buildings to increase their relevance for a low-carbon future; engaging with agricultural companies to stop their use of antibiotics in the food chain; or seeking to improve human rights in the supply chains of fashion companies. Such actions aren’t ‘woolly’ or taken because they make us feel better – they are commercially driven and allow us to meet our fiduciary duty.

ESG integration does not, as some misinformed commentators have it, mean blanket exclusions from certain sectors

There are times when we exclude investments at a business, fund or stock level and these decisions are driven by values and ethics. Exclusions will vary between asset managers, and their funds, and will be issue-specific and nuanced. An ethical fund is so called because of its ethical policy. To repeat: it is not the same thing as ESG integration.

Similarly, “sustainable” is an ambiguous phrase and routinely misused. It is a system condition, not a state of being for an individual, fund or institution in isolation. Sustainability is an ambition and sustainable finance will have a huge role to play in helping us get there.

It should be acknowledged that achieving sustainable outcomes and correcting market failures are exceptionally difficult, hard to measure and require a system-wide view alongside consistent, long-term engagement with governments, regulators, multilateral organisations and other policymakers. This type of macro stewardship is another way asset managers can differentiate.

Clients that want to go above and beyond ESG integration can today select solutions deemed ‘ethical’ or tied into helping deliver ‘sustainable outcomes’ such as net zero emissions. Back to my point on the need for clarity, there is currently no simple and easily understandable scale from light green to dark green in terms of fund offerings.

This has created confusion, something that has not been alleviated so far by SFDR fund classifications in Europe. Customers need clear labelling, and the UK can improve on this with its 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

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.

There will always be dissenting voices, but by making a concerted effort to better explain the terminology and creating clear product choices, we can put the ESG backlash back in its box.

Related views

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). 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. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe, this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK, this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

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: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.

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 27, 101 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 based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

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”) 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.