The IGC is of the view that investment managers should take account of both the financial projections but also issues relating to the ESG factors of your investments. While the financials of any investment are crucial, taking account of the ESG factors can help identify both the additional risks that a company faces but also highlight the potential for superior returns. A focus upon all factors should allow managers to build a rounded view of the attractiveness of individual investment opportunities.
Our previous annual reports have always referred to ESG matters. This year, the FCA has put in place new rules that require us to report on specific ESG criteria:
Last year, we wrote in our report that Aviva had committed to being net zero carbon by 2050. This year they have significantly stepped up their ambition and brought forward their plan to reach their net zero carbon goal by 2040. They are the first major insurer in the world to announce a 2040 target. This target includes being net zero in their policyholder investments (aggregated across all Group companies) which are the most significant contributor to Aviva’s carbon footprint – and also their own shareholder investments and corporate operations. There are interim targets for investments between now and 2040:
We met the Group CEO of Aviva plc, Amanda Blanc, specifically to discuss Aviva’s ESG policies. Amanda’s commitment to the net zero targets and ESG policies was very clear, and Aviva’s Board has a clear appreciation of the challenges involved to deliver them. She noted that the Board understands that metrics and actions must be put in place quickly to track progress against plans. These already exist in some areas but are far more difficult in others. We look forward to meeting her again when we look at progress over the next year.
We explain more below about the work Aviva has done and is doing to help them achieve their ambitions.
ESG is not simply about the investments which Aviva manages. It goes significantly wider than that and includes considerations such as Aviva’s policies on diversity and inclusion, their involvement in local communities, their work with charitable organisations and their engagement with other global firms. To reach their climate ambition, however, their efforts need to be focussed on driving down their carbon footprint, reducing emissions and investing in greener infrastructure.
In 2010, Aviva set itself a target to reduce their own operational carbon emissions by 70% by 2030. They have already achieved a reduction of 76% compared to 2010 levels in 2020 and have set a target of a further 5% reduction in 2021 to achieve net zero by 2030. Many of the areas they measure have benefited from significant reductions in travel and office occupancy during the pandemic, however, Aviva are setting targets to maintain levels of business travel to reflect levels reached within 2020.
To put this into context, greenhouse gas emissions have reduced by:
Aviva is aiming for all their offices to use 100% renewable energy by 2025 along with 100% electric or hybrid vehicles for their fleet of 1,500 strong fleet.
Initiatives we have seen implemented include the installation of a solar carport at the company’s offices in Perth. It is one of the largest renewable installations of its kind and consists of over 3,000 solar panels and 50 car charging points. At its peak, it will take the office off the National Grid for five hours each day and save 400 tonnes of carbon emissions each year.
Aviva has two main default investment funds available to your employer: My Future and My Future Focus.
Consideration of ESG factors is integrated into the design and management of My Future Focus. Part of this integration includes a “tilt” on the passively managed regional equity funds, such as the UK Equity Index Tracker fund, used within My Future Focus. This sees the fund’s investments tilted towards companies with higher ESG scores, based on an in-house scoring system developed by Aviva Investors’ global responsible investment team, by discarding those companies ranked in the lowest 10%. The funds also make extensive use of the Aviva Investors voting policies in support of such considerations. For the actively managed funds used within My Future Focus, such as the UK corporate bond fund, the consideration of ESG factors is taken into account alongside a range of financial metrics and research. This process uses the in-house ESG score complemented by research provided by the global responsible investment team. These are used by the portfolio managers as part of their investment decision making process and for ongoing risk management.
Aviva Investors has developed reporting metrics on carbon intensity and ESG factors and also report to us on engagement and voting activity. In 2020, a report published by ShareAction, a registered charity with a focus on responsible investment, placed Aviva Investors 5th out of 75 investment managers assessed for their responsible investment practices and “how they manage their ESG risks and opportunities”. Only the top five managers received an A rating from ShareAction, defined as “Strong management of risks and opportunities as well as impacts across multiple responsible investment themes” which include responsible investment governance, climate change, human rights and biodiversity. None, however, received a AAA or AA rating as none demonstrated leading practice across all assessment areas.
Source: ShareAction
We will be working with Aviva and Aviva Investors to understand how they will act on the recommendations made in the ShareAction report. We have also invited them to a future meeting to discuss the findings of their report and how they believe their recommendations can be implemented.
The My Future default fund is overseen by BlackRock rather than Aviva Investors and it has taken a little longer to integrate ESG considerations into the fund. Aviva has been working with BlackRock to design a new fund – the BlackRock World ESG Insights Equity fund. Within this fund BlackRock will seek to have a greater weighting to companies with a higher ESG score, based on BlackRock’s own methodology. This scores companies based on a broad range of ESG factors, and seek to deliver a 50% reduction in carbon intensity (a measure of the carbon emissions emitted by a company) compared to the FTSE Developed Index (which is made up of companies listed in developed markets and countries, such as the UK, US and Europe).
The IGC’s independent consultants noted this evolution as “fit for purpose” at the present time, but with this area developing rapidly across UK pensions more development would be needed to avoid falling behind in the future. This is an area we will be debating further with Aviva.
This policy sets out a number of principles and details of how these are integrated in practice. The policy states that ESG factors should be integrated within all active investment decision making processes. Via their investment managers, they will use voting rights to exert influence over the companies in which they invest to improve their environmental, social and governance performance. In addition, the assessment of how those managers who manage funds to an objective set by Aviva incorporate the consideration of ESG factors within their investment process is captured as part of Aviva’s manager oversight process and is fully integrated into their fund manager assessment framework.
We have been provided with a copy of Aviva Investors Stewardship Policy which describes Aviva Investors' approach to stewardship and responsible investment including details of their policies and procedures. At its simplest, stewardship is the responsibility to take care of something in one's keeping. In this case, it involves the effort and activities undertaken by and on behalf of, institutional shareholders to monitor, engage and, where appropriate, intervene on matters that may affect the long-term value of investee companies and the capital invested in them. This can encompass issues on such things as strategy, performance, corporate governance, and environmental and social issues that may materially affect the future sustainability of companies and shareholder value.
Aviva Investors integrate ESG considerations into their investment decisions, working with fund managers and analysts across all asset classes, customising ESG integration for each investment process, to deliver improved investment outcomes for clients. Using engagement and their voting rights, they use their influence to promote good practice among those companies in which they invest, and to gain insight and reduce investment risk on ESG issues for their clients. They advocate policy measures that support longer term, more sustainable capital markets, aiming to correct market failures such as a lack of corporate disclosure on ESG risks and climate change to improve long-term policy outcomes.
We have seen first-hand evidence of how their engagement drives change in some major organisations. Examples include challenges on racial equality policies, gender diversity, climate change, board composition, human rights and board governance and effectiveness. In 2020, Aviva investors held over 1,500 substantive ESG engagement meetings which is over 200 more than in the previous year. Over 2020, Aviva Investors achieved 90 engagement ‘wins’ where they saw changes in corporate behaviours in line with a prior Aviva Investors’ engagement ask.
Through this initiative a target list of 30 companies from the oil and gas, metals and mining, and utilities sectors was identified, based on their contribution to global carbon emissions. These companies alone are estimated to contribute towards approximately a third of all global emissions on an annual basis.
The companies have been further split into two risk categories based on the availability of the information they disclose and their ESG scores. The two risk categories are described as follows:
Aviva is piloting an investor opinion tool with Tumelo and a selection of workplace pension members. Tumelo’s platform helps pension members to see which companies their pension is invested in and to have a voice on the ESG issues these companies are facing. A selection of Aviva workplace members has the option to voice their opinion on issues such as climate change, gender equality, human rights, chemical pollution and political lobbying ahead of the companies’ Annual General Meetings (AGMs). Their opinions are collected through the platform, anonymised, and sent back to the fund manager, which incorporates them into its decision-making framework.
The real-world impact is then reported back to members once the AGM has passed. Through Aviva’s partnership with Tumelo they are hoping to give their workplace members greater transparency over where their pensions are invested, while empowering them to play an active part in the engagement and voting approach to investing.
As well as helping to connect customers with their money, Tumelo helps connect Aviva’s stewardship and fund management teams with insights into the priorities and values of Aviva’s customers. This helps Aviva represent their voices in the way we manage their money.
Aviva reviewed and renewed their ESG policies as an organisation in late 2020 and early 2021 and following this announced some specific and ambitious goals. We welcome the clear communication of this to us and recognise that the policies are leading amongst the financial sector. The ambitions of Aviva incorporate your pension funds and we believe this strong emphasis on ESG and climate change is in your interests in terms of your pension with Aviva.
There is good progress on reflecting ESG integration within the main default investment funds in which most of you are invested. The progress is slower with My Future than My Future Focus and we would like to see this accelerate to help achieve the next interim goals. We will be discussing the evolution of this fund with Aviva in the coming months. We also wish to look further into how these aims and ambitions will be met in the large number of self-select investment funds, where you are able to choose alternative investment funds to the default funds.
Nonetheless, the stated commitments of Aviva and translation into actions so far are welcomed and we will be looking to see this commitment lead to further evolution of the investment funds.
In our view, Aviva is amongst the leading pack of pension providers in adopting strong ESG policies and importantly in implementing those policies across their business and into members’ investments.