Introduction

The Aviva Investors Sustainable Outcomes strategies have a clear philosophy – to allocate capital to companies that support the transition to an economy that is lower carbon and resilient to a warmer world, works towards halting and reversing nature loss, and is more socially equitable.

It is a philosophy grounded on a view of double materiality. Understanding these themes supports long-term financial objectives as well as allowing us to target companies we believe are developing solutions that can drive the transition or support it through setting best practice.

The Sustainable Outcomes Transition strategies consider a long term time horizon in which our dual objectives work in tandem. We seek to invest in companies which we believe have resilient business models and are primed to benefit from the transition.

Climate change, resource scarcity and social change are structural megatrends that are changing our economy – they will affect all sectors. In the face of biodiversity and climate crises and gross social inequality, we need the transition to happen quicker. We need companies to decarbonise quicker than current commitments, otherwise we will not avoid the worst impacts of climate change; we need companies to start reducing precious natural resources they consume, otherwise we will lose them; and we need companies to think harder about human rights risks in their value chains, otherwise we will continue to compound the gross inequalities in global markets and place reputational risk on our clients.

Importantly, there were positive signposts in 2022 – not least the US Inflation Reduction Act, COP15 in Montreal, and the European Commission adopting the directive on Corporate Sustainability Due Diligence (CSDD) – indications of a steepening policy regime that will bear thematic opportunities for investors.

Watch our introduction video from
Sam Tripuraneni, Head of Sustainable
Outcomes at Aviva Investors.

Watch our introduction video from
Sam Tripuraneni, Head of Sustainable Outcomes at Aviva Investors.

More needs to be done, however. This is why our Sustainable Outcomes strategies focus on delivering against their sustainable objectives through three key areas:

Capital allocation

As an active investor, we positively select companies we believe are supporting the transition and leading their peers.

Company engagement

We take long-term views on major thematic trends. We want companies with business models that support our investment and sustainable conviction. Through engagement, we encourage them to address areas of potential weakness.

Macro stewardship

We engage with policymakers to identify and try to rectify market failures that result from these long-term risks. That way, we play our part in ensuring the structural integrity and sustainability of financial markets – supporting our clients’ long-term allocations.

Climate Transition

At temperatures 1.1°C above pre-industrial levels, the physical impacts of climate change are increasingly evident globally.

In 2022, we have seen heatwaves and droughts affecting most parts of the planet; these have reduced industrial traffic on shrunken rivers, prevented nuclear and hydro power plants from operating, created record breaking wildfires and reduced productivity of outdoor work.

But it is in regions least responsible for climate change where the impacts are perhaps greatest. The Horn of Africa is experiencing its longest drought in 40 years, which is projected to create famine conditions affecting over 20 million people in early 2023, while 33 million people in Pakistan were impacted by floods that caused US$32 billion of damage. More positively, agreement was reached at 2022’s COP27 climate change conference to establish a “loss and damage” fund for vulnerable countries, providing compensation to those impacted by climate events.

As we start to see the shifts in regional climates (the likes of Spain, Portugal and California are all experiencing their driest climate in 1,200 years, for example), questions will increasingly be asked about whether we are prepared, and can adapt fast enough, for the changes to come. The Adaptation Gap report, produced by the United Nations, highlights the five to ten times gap between current adaptation funding levels and requirements; this will only grow as adaptation costs are forecast to increase.

Adaptation will not only need to support shifts in agricultural production patterns and water resources, but increasingly focus on infrastructure. A 2017 report¹ found damages to European infrastructure from climate change could increase sixfold by the middle of this century from a 2017 figure of €3.4 billion; heatwaves could account for 92 per cent of the damage to Europe’s transport sector alone as roads were built and designed in cooler climes. We have also seen physical climate risks manifest in other long-lived infrastructure.

The Trans-Alaska Pipeline, for example, is threatened by the thawing of the permafrost on which it sits, with operators having to install technology to draw the heat out of the permafrost to keep the pipeline supports stable. All these factors necessitate more aggressive action to curb greenhouse gas (GHG) emissions. Ahead of COP27, countries were invited to strengthen their ambitions. Sadly, there was a limited response to this with the fallout of the Russian-Ukraine conflict dominating political attention.

However, we have seen more positive developments at aa unilateral level, with changes in government in Brazil and Australia signalling greater engagement to prevent climate breakdown. Now, 132 countries (covering 88 per cent of global GHG emissions)² are committed to net zero (though currently there is an overreliance on carbon offsets to reach these targets). In addition, we have seen a near doubling in companies committing to a net-zero ambition on the Science Based Targets (SBT) initiatives website. More importantly still is the year-on-year doubling in near term SBTs,³ demonstrating growing corporate action to address emissions in their value chains.

¹Science Direct
² Net Zero Tracker
³ Both set and committed Near-term SBTs are included.

Key risks

Investment risk & currency risk

The value of an investment and any income from it can go down as well as up and can fluctuate in response to changes in currency and exchange rates. Investors may not get back the original amount invested.

Credit and interest rate risk

Bond values are affected by changes in interest rates and the bond issuer's creditworthiness. Bonds that offer the potential for a higher income typically have a greater risk of default.

Derivatives risk

Investments can be made in derivatives, which can be complex and highly volatile. Derivatives may not perform as expected, meaning significant losses may be incurred.

Illiquid securities risk

Some investments could be hard to value or to sell at a desired time, or at a price considered to be fair (especially in large quantities), and as a result their prices can be volatile.

Sustainability risk

The level of sustainability risk may fluctuate depending on which investment opportunities the Investment Manager identifies. This means that the fund is exposed to Sustainability Risk which may impact the value of investments over the long term.