Aviva Investors: Better corporate disclosure needed to help sustainable finance go mainstream
EXCLUSIVE: Investment firms are heeding climate warnings and honing their approach to sustainability, but ultimately need more information from the businesses in their portfolios in order to drive transformational change.
That is according to Aviva Investors’ global head of governance Mirza Baig, who plays an instrumental role in both implementing the firm’s responsible investment strategy internally and driving its external advocacy for a global finance sector that prioritises people and planet over short-term profits.
On the latter, Aviva Investors is represented on the EU High-Level Expert Group on Sustainable Finance (HLEG) – a body which, in 2018, successfully convinced the EU to begin designing mandatory environmental risk and impact disclosures for all financial market participants.
The firm is also a founding partner of the World Benchmarking Alliance, alongside the UN Foundation and the Index Initiative. In the absence of mandatory disclosures in some markets – and, therefore, easily comparable sustainability data – the Alliance produces free benchmarks ranking businesses on their contributions towards the Sustainable Development Goals (SDG).
While heartened by the progress of these initiatives – and similar pushes for disclosure – Baig told edie that environmental, social and governance (ESG) data disclosed by corporates is, on the whole, still not detailed or uniform enough to help investors make all finance green finance.
Considerations of the transition and physical risks of a Paris-aligned world, he argued, are particularly sparse. A joint report from Aviva Investors and more than a dozen other finance giants last year priced those risks at $10.7trn.
Speaking to edie ahead of his appearance at next month’s Sustainability Leaders Forum (scroll down for details), Baig said: “I still think we are at a point where we are guessing, to some degree, the impacts climate change will have on strategies, operations and capital allocation.
“Once you move out of big oil and extractives, it becomes difficult to predict, with any real certainly, the climate impact of projected earnings.
“The more we are making guestimates, the less confidence we will have in certain valuation models and, as a result, it’s difficult to credibly build portfolios.”
Indeed, the Task Force on Climate-Related Disclosures’ (TCFD) latest status report revealed that, despite a 50% year-on-year increase in pledges to disclose, the level of information provided is broadly not of “decision-useful” quality. This finding stood in stark contrast to the UK Government’s previous continued assertations that disclosure on a voluntary basis was sufficient.
A new era of disclosure?
Baig himself admits that his comments come at a time when the discussion around mandatory disclosure in line with the TCFD’s recommendations is continually heating up.
The Aldersgate Group recently wrote to the UK Government warning ministers that the nation’s long-term net-zero target is unlikely to be met unless TCFD-aligned disclosures are mandated between 2020 and 2025.
Expert representatives from the Climate Disclosure Standards Board (CDSB) and some of the UK’s biggest dairy and property development firms concluded, more recently still, that it is “highly likely” that the Government will make such a move. Their certainty was based in the long-term net-zero target but cemented by recent policy changes such as the introduction of the Streamlined Energy and Carbon Reporting (SECR) scheme and the unveiling of the Green Finance Strategy.
From an investor perspective, Baig said mandatory disclosures could bring about “a level playing field of high-quality data and a unified level of disclosure around the extent to which companies are beginning to embed the findings of that data into their governance, strategy, operational standards and capital allocation”.
In-depth ESG information disclosed in a uniform manner, Baig explained, would prevent investment firms from creating sustainable products in which any single sector was over or under-represented, therefore enabling a broader range of businesses to secure financial backing for their own low-carbon transitions.
Baig maintained that despite this challenge, Aviva Investors has been able to evolve its sustainability approach since the 1970s, from the “blunt exclusion” of highly polluting firms, to “solutions-focused investing” and, latterly, creating portfolios that are Paris-aligned and contain more diverse holdings than solely clean energy firms.
In developing its newest “green product” – the Sustainable Income and Growth Fund – Aviva Investors used all of these methods, he explained.
Investable firms which ranked in the bottom 20% globally for ESG oversight, competence or strategies were first removed from the decision-makers’ table. Aviva Investors then scoured the remaining offerings to identify businesses across the world’s largest sectors with “strong fundamentals, governance and sustainability practices”.
For Baig, this evolution of approach has been a natural one, given that changing policies and business practises, compounded by technology advancements, new scientific research and greater public engagement and activism around ESG issues has resulted in the “fundamental long-term alignment” of environmental, economic and social sustainability.
He said: “When we used the word sustainability [to describe the new fund], we started reflecting on how we could go above and beyond traditional interpretations… That started a debate about how we identify sectors and individual companies that will be resilient to structural challenges and changes over 20 or 30 years.”
To further its triple-bottom-line approach this year, Aviva Investors will be refining its internal ESG models by working with data scientists, Baig said.
This project will, it is hoped, help the firm to develop more bespoke “sustainable” offerings and maintain the performance of its existing offerings as it continues – like many finance giants - to divest from fossil fuels.
Aviva Investors at edie’s Sustainability Leaders Forum 2020
Aviva Investors’ global head of governance Mirza Baig will be appearing at day one of edie's Sustainability Leaders Forum 2020, to jointly deliver a workshop on investor and economist perspectives on climate action alongside experts from M&G Investments and CDSB.
During the two-day event at London's Business Design Centre on 4 & 5 February, some of the biggest companies, individuals and organisations championing sustainability will gather to discuss the emergency response in transitioning to a net-zero economy.
The flagship, multi-award-winning event features keynotes speakers including former President of Ireland Mary Robinson; Rebecca Marmot, Unilever CSO; Tom Szaky, TerraCycle CEO; Gilbert Ghostine, Firmenich CEO plus directors and senior managers from Interface, Vattenfall, John Lewis, Taylor Wimpey, Aviva, Pernod Ricard, LEGO Group, M&S, Diageo, Tesco, WSP, BASF, Mondelēz and more. For details and to register, visit: https://event.edie.net/forum/