Thick skins and tin ears: Facing up to the ESG backlash

By Mark Versey, Chief Executive Officer, Aviva

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 deliver.

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.

In the latest example of ‘wise after the event’ disapproval, some commentators have cited Russia’s invasion of Ukraine as ‘evidence’ that 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, largely because of ESG considerations.

Second, Russia’s invasion only highlights the critical need to accelerate the energy transition, so that we are not dependent on supplies from hostile and unpredictable regimes. We must form a principles-based view of the world we want to live in and take strategic actions to build it. We do so in the recognition system-wide change is hard, requires sacrifice, and we must 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 to coal, for example, in the face of the biggest systemic threat to the planet (and therefore companies and countries) does not constitute strategic thinking.

Companies and 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.

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.

Where we do need to do a better job is in being clearer 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 – because this is where 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, the economy and society. We’ve been using our voice and influence in this way for five decades.

Investing responsibly is not a fad: It is an investment belief.

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ESG integration is purely investment orientated: It assesses risks and opportunities associated with various ESG factors and embeds them in the investment process. 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 mean blanket exclusions from certain sectors. On the contrary, ESG analysis is often the critical input in deciding whether we can turn ‘brown’ assets ‘green’.

When we are successful in doing this, we believe it will add value to most investments, irrespective of asset class, whether that is pushing energy companies to move more decisively in transitioning to renewables or refurbishing older buildings to increase their relevance for a low-carbon future. Such actions aren’t ‘woolly’– they are commercially driven and allow us to meet our fiduciary duty.

Of course, there are times when we exclude investments, 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 is a key input helping to progress us toward that ambition. It should be acknowledged that achieving a sustainable outcome is exceptionally difficult, hard to measure and requires a system-wide view along with consistent, long-term engagement with governments, multilateral organisations and other policymakers to correct market failures. This type of macro stewardship is another way asset managers can differentiate.

Clients that want to go above and beyond ESG integration can select solutions deemed ‘ethical’ or tied into helping deliver ‘sustainable outcomes’. Currently, however, there is no simple and easily understandable scale from light green to dark green in terms of fund offerings. This has created confusion, something not alleviated by SFDR fund classifications in Europe. Customers need clear labelling, and the UK can improve on this with its own classifications. 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. 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.

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