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What investors want from ESG reporting

Author: ICAEW Insights

Published: 14 Dec 2022

In the asset management field, Aviva Investors has exemplified strong action on large-scale ESG matters through a blend of micro- and macro-stewardship.

One notable aspect of Aviva Investors’ role as a business with robust environmental, social and governance (ESG) credentials is its consistency – its ethos is not a recent shift, but part of a lengthy track record. “We can trace our voting activity back 50 years,” says Head of ESG Investment Directors Andy Ford. “So, we have a really strong heritage in this arena.”

Currently, the base of Aviva Investors’ work is ESG integration. Comments from media outlets and some of its stakeholders indicate a misunderstanding that it’s an interchangeable term with impact investing, explains Ford. “But they’re really quite different.”

In asset management, he explains, ESG integration involves expanding your dataset of opportunities to drive better performance for your client investors, using ESG-focused criteria. It also supports risk management and better equips the firm to fulfil its duties to clients in relation to various financially material topics. Impact investment, meanwhile, has the dual objective of generating a good return for clients, while producing a well-defined, tangible and measurable ESG outcome. Ford considers his firm to be on a journey from the former to the latter.

“Clearly,” he says, “if you’re investing in companies that are progressive and driving change – for example, by coming up with solutions for the energy transition – then the indirect result of that is a positive impact from your investment. But currently, all our funds are ESG integrated, and we’re looking to develop true impact funds as time goes on.”

On a company-by-company basis, Ford points out, the firm looks to drive change by engaging its investees with a little nudge theory. “Our preference is to remain invested in a particular business if we think there’s potential for guiding it on to a more sustainable path,” he says. “But more than that, we also approach this whole territory through a combination of micro- and macro-stewardship.”

Systemic change

“We’re seeking to exercise the full scope of our duties as responsible asset managers,” says Senior Manager, Global Responsible Investment, Jess Foulds. “We do that not just by acting in our clients’ best interests – but by promoting market integrity. And in that context, we have several different levers we can use on a number of different levels.”

One lever, Foulds notes, is to liaise with governments around the world to identify market failures, then help to bring about policy interventions to tackle those issues – thereby creating a more sustainable financial system. “For example,” she says, “when the Corporate Human Rights Benchmark was launched, there was no way to assess which companies were doing better or worse than others. So, we helped to draw attention to that failure and collaborated with other stakeholders on forming a structure to address it.”

Foulds highlights further examples of the firm’s macro-engagements:

  • Principles for Responsible Investment (PRI): “As well as being among the initial group of signatories to PRI, we played a key role in drafting the principles themselves. So, we were part of a movement that helped to bring ESG into the mainstream.”
  • UN Sustainable Development Goal (SDG) 12.6: “As part of a coalition of stakeholders, we helped to put together the text that enshrined sustainability reporting at the heart of a UN SDG. We also attended the UN General Assembly at which the SDG was launched.”
  • Glasgow Financial Alliance for Net Zero (GFANZ) and UK Transition Plan Taskforce (TPT): “One major question at the moment is: what form of sweeping systems change will be required for the world to hit the targets set out in the Paris Agreement? We have been working with governments, GFANZ and the TPT to determine how that change could be achieved by reworking the broader, external operating environment. Which leads me to…”
  • Review of global financial architecture: “This is a project on which we have engaged with a variety of different stakeholders and schemes, and is now gaining global momentum. Two of the biggest factors behind that push are, firstly, the COP27 outcome document’s recognition of the need for change in the financial system and, secondly, growing support for the Bridgetown Agenda. Spearheaded by Barbadian Prime Minister Mia Mottley, Bridgetown proposes an urgent overhaul of the world’s financial system to address a ‘polycrisis’ that is threatening to reverse development in the Global South. We’re also looking at what the regulatory and supervisory system could do to better enable the global delivery of Paris.”

Emerging factors

Aviva Investors has also recently contributed to EU initiatives the High-Level Expert Group on Sustainable Finance and the Action Plan for Financing Sustainable Growth. Foulds says: “Those programmes have accelerated the extent to which our industry has engaged not just with ESG integration, but general sustainability issues – plus, the double-materiality aspect of reporting, which was a key theme we fed into.”

On that point, she notes: “We see the double-materiality lens as key to moving the world towards a sustainable financial system of the future – because what’s financially material now doesn’t necessarily reflect emerging factors behind the broader, systemic risk picture.”

On a micro level, the firm is addressing specific sectors through its Climate Engagement Escalation Programme, which reaches its second anniversary in February. Ford explains: “We went to 30 of the most systemically important carbon emitters on the planet – principally in the oil and gas arena – and presented a range of tasks, including the adoption of a net zero 2050 target. And we’ve been pleasantly surprised with the level of engagement we’ve seen from those companies – which, at the point we launched the scheme, accounted for a third of all global emissions.”

He notes: “That initiative could prove to have significant impacts – so we are now in the process of expanding it. Our most recent sectoral addition was aviation, and our next port of call will be the chemicals industry.”

Promoting integrity

In March last year, the wider Aviva company (also comprising a multinational insurance brand) made an ambitious commitment to be net zero by 2040. In light of the advocacy and outreach that it is immersed in, the Aviva Investors arm – winner in the ‘Moving financial markets (large organisations)’ category at this year’s ICAEW Finance for the Future Awards – is seen across the business as a vital component for making that happen. But what sorts of challenges is it facing along the way?

“The existential crises at the root of our ESG work are pretty major,” Foulds says, “and no one has the definitive answers. So, there’s a degree of vulnerability in conceding that while we’re trying to build coalitions and ask stakeholders to work together. Learning at the same time as taking action is like trying to build the plane and fly it all at once – and there’s an extent to which some topics and concepts must be taken on faith when you’re asking senior leaders at other organisations to buy into this agenda.”

She notes: “The scepticism I’ve encountered hasn’t really been to do with climate science itself, which is overwhelmingly accepted. It’s based much more on a broader, ‘What can we even do?’ emotion. Not everyone embraces the idea that there’s a role for financial institutions to play in working closely with governments on ESG. And not everyone sees it the same way we do – that it’s a means of promoting market integrity and, therefore, serving the best interests of our clients.”

Foulds adds: “I’m not saying that we’re alone – but more of us could be having these positive impacts at a systemic level. So, the most pressing challenge right now is upscaling this type of activity so that we’re all pulling in the right direction.”

How does the firm aim to overcome that challenge going forward?

“It’s about taking a diplomatic approach, and being honest,” Ford says. “It’s true: we don’t know all the answers. But the more of us who are willing to collaborate, the more likely we are to find them. I’ve recently started a Masters in biodiversity, and the projected figures on all the plant and animal species we stand to lose through inaction – or acting too slowly – are terrifying. This is a race that we all win together.”

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