Louise Piffaut, Head of ESG, Public Markets
From direct investments and engagement with companies to dialogue with governments and regulators, we believe stewardship efforts can deliver better outcomes for clients.
Read this article to understand:
- How holistic stewardship works
- How engagement can be carried out at both the “micro” and “macro” levels
- How collaborating with stakeholders across sectors can help address obstacles to progress on climate change and other issues
Over recent years, we have seen growing awareness among investors of the huge challenges posed by climate change, biodiversity loss and societal issues such as inequality.
As sustainability has risen up the agenda, “engagement” has become a watchword among asset managers. Quite rightly, corporate engagement – interaction with investee companies on environmental, social or governance factors – is now recognised as a key part of their fiduciary responsibilities.
Engagement with companies will always form a core part of any truly sustainable approach to investing, including our own.* But companies do not act in isolation; they are deeply embedded in broader economic, market, industrial and social systems. If these systems are operating unsustainably, companies may be incentivised to do the same, which means there are inherent limitations as to what can be achieved through corporate engagement alone.
To make a real difference on the issues that matter to clients, then, engagement must go further and deeper than discrete interactions with individual firms. We believe it is important that investors also work with governments, multilateral institutions and broader industry initiatives to understand the shifts sweeping economies and unlock projects that create long-term value. To do this, we must build partnerships, share information and avoid siloed thinking. In other words, we must connect.
At a micro level we have the opportunity to engage with the companies and the tenants of the buildings in our investment portfolios, to support sustainable action.
At a macro level, we can undertake engagements with sovereign issuers, global policymakers and standard setters to help address systemic obstacles to progress. And in-between, we can engage across sectors and value chains to bring relevant actors together and devise shared solutions to sustainability challenges.
Engaging with issuers enriches our understanding beyond what would be possible via desk-based research, and can give us “bottom-up” insights into market failures that need to be addressed. Macro engagement can give us a “top-down” sense of how policy and regulation are developing and a more rounded view of the investment landscape. We call this holistic stewardship.
Supporting change
So how does it work? Start with the basics. As an asset manager, we have a legal obligation to act as a good steward of our clients’ capital. We must manage this money prudently, transparently and in line with their best interests.
When investing in shares of listed companies, we have the opportunity to engage with them on governance and other material issues as well as vote at their annual general meetings (AGMs). Proxy voting remains one of the key tools asset managers can use to escalate concerns at companies and contribute to positive outcomes.
Similarly, when investing in bonds, we can engage with issuers as creditors – this can be particularly helpful when it comes to industries that tend to raise more debt than equity. Bondholder engagement also widens our scope to private companies and to government issuers.
Likewise, as investors in real assets, we can collaborate with the occupiers of our buildings to solve problems. When lending for new projects, we can attach conditions to loans, such as requirements for transparent reporting on sustainability metrics.
This is stewardship at a “micro” level. It helps us to deliver long-term financial outcomes our clients seek and can enable them to meet their own sustainability goals, including net-zero emissions targets.
Engagement with individual companies is most effective when the overarching rules, regulations and incentives that govern the financial system are fit for purpose and incentivise the organisations acting within it to act sustainably. But there are cases where the efficacy of corporate engagement is limited due to the presence of market failures and other deep-rooted systemic problems which inhibit action.
From micro to macro
Consider climate change, perhaps the most pressing systemic risk we face. In many ways, the normal operation of the market only deepens the problem. In the absence of consistent international standards and regulations on the disclosure of greenhouse-gas emissions, many companies still fail to report material climate-related information. And, despite the introduction of carbon pricing in some countries, firms are still mostly free to pollute the atmosphere without accounting on their balance sheets for the full cost of the damage they are causing to the planet.
It is a classic example of market failure. If these problems are not addressed, firms that set themselves ambitious objectives – such as investing in new processes to reduce their carbon emissions – might find themselves at a competitive disadvantage and lose ground within a system that does not adequately reward such investments.
One of the main ways to correct market failures is through policy action, such as by imposing tougher carbon pricing to ensure the biggest emitters are incentivised to do better.
This does not absolve asset managers of responsibility. On the contrary, we believe we have a responsibility to use our knowledge and expertise as investment intermediaries to highlight relevant issues across sectors and supply chains where they arise, and engage, whether collaboratively or individually, with sovereign issuers, global policymakers and standard setters, in addition to companies, to support in bringing about the necessary changes. We call this macro stewardship.
Levels of influence
A holistic approach, then, can encompass stewardship at the micro and macro levels. More specifically, we have identified different levels of the system where there are opportunities to engage and bring about change (see Figure 1).
Figure 1: Levels of influence
Note: We undertake engagement at each level, but the process may not apply to every holding in every fund. Refer to product prospectuses for further information.
Source: Aviva Investors, September 2024.
Level 1: Direct
Through our private markets business, we have the opportunity to develop property, infrastructure and nature-based projects that seek to deliver strong risk-adjusted returns and align with social and environmental objectives.
Level 2: Issuer
Stewardship carried out among owners of shares and bonds, where we engage in constructive dialogue to gather insights to inform our investment decisions as well as voice our support for more sustainable practices.
Level 3: Sector
Engagement across industries to address structural problems that discrete interactions with individual companies will not fix.
Level 4: Value chain
In a similar vein to sector, some solutions may have to come from collaboration between, for example, companies responsible for significant carbon emissions and those that rely on their products.
Level 5: Country
Country-level stewardship is conducted through dialogue with governments, including policymakers at finance ministries, central banks and climate departments.
Level 6: International institutions
International action. Global challenges such as climate change are not constrained by physical borders, so effective stewardship efforts must also have an international reach. Our Sustainable Finance Centre for Excellence engages with global policymakers, standard setters and other changemakers with the intention of accelerating system-wide reform to correct material market failures.
Top-down, bottom-up
We seek to work in a spirit of true collaboration to ensure our teams’ efforts across the levels are properly aligned. For example, the leads of our country and international institutions stewardship teams work together on sovereign engagement, on issues such as Nationally Determined Contributions to the goals of the Paris Agreement, because while NDCs are set at the national level, they form part of the global response to climate change.
By building partnerships among external stakeholders, meanwhile, we aim to create multiplier effects, amplifying the impact of sustainable initiatives and accelerating progress. Joining the dots in this way can make engagement more powerful.
We know how effective micro stewardship can be, but we also know that a company cannot be expected to act against its commercial interests, because it operates within an ecosystem and a broader policy and regulatory environment. Through looking at the whole system, we can better target our work and maximise the likelihood of real progress.
More specifically, a holistic approach offers an insight into the market failures that need to be addressed and the leverage points that can yield results. For example, we undertake regular value-chain roundtables to identify barriers to climate action across sectors, even for those companies trying to drive change. They might include challenges in the availability of renewable-energy infrastructure; technological impediments; and competition from state-owned enterprises (which may have different incentives from private firms).
This information informs our advocacy with other investors, regulators and policymakers to help find solutions. At the same time, our macro stewardship work gives us insights into the direction of policy and regulation, information that can be fed back to the investment desks to inform their decision-making and help them review portfolios.*
Next steps
Holistic stewardship involves an ongoing process of dialogue, collaboration, challenge, iteration and refinement. As well as climate, our current priorities are related to biodiversity loss, clean water, human rights, decent work and other pressing issues.1
On climate, a particular focus of our engagement is with key energy demand sectors like chemicals or heavy-duty transport, where accelerated decarbonisation is imperative to reshape demand for fossil fuels. Due to the complexity of their supply chains, use of technology, and reliance on energy and physical infrastructure networks, these are areas where the joined-up methods of holistic stewardship are especially important.
Our bilateral corporate engagements will evolve and be complemented by discussions with key actors across the value chains of vital sectors. Our first roundtable took place in 2023, on the topic of sustainable aviation fuels, and was attended by companies from across the aviation value chain, including airlines, engine manufacturers and biofuel producers.
These roundtable discussions can help us identify key barriers impeding decarbonisation, as well as develop a shared understanding of the challenges and potential policy mechanisms to enable more viable sector-wide energy transitions. Insights from these roundtables will inform our engagement with relevant governments, regulators and standard setters.
Thanks to increased awareness of the monumental risks posed by the climate crisis and other sustainability issues, the wider financial industry has started to be more proactive in its stewardship work, and this is to be welcomed.
But we believe a holistic approach that engages with a range of stakeholders in the interests of positive change remains our best hope of tackling the challenges we face, and of identifying attractive investment opportunities into the future. The key is to connect.
* It is important to note that while we strive to implement these principles across our strategies, the complete holistic stewardship engagement process is not systematically applied across all portfolios. Engagement approaches for specific products are outlined in each prospectus. We may not engage with all holdings and bespoke programmes may be in place for some but not others (as per the prospectus).
Reference
- “Decent work” is defined by the International Labour Organization (ILO) as follows: “Decent work sums up the aspirations of people in their working lives. It involves opportunities for work that is productive and delivers a fair income, security in the workplace and social protection for all, better prospects for personal development and social integration, freedom for people to express their concerns, organize and participate in the decisions that affect their lives and equality of opportunity and treatment for all women and men.” See: https://www.ilo.org/topics/decent-work.
