Introduction

This is the second iteration of the outcomes reports that Aviva Investors has produced for the Sustainable Transition range, comprising our Climate Transition, Natural Capital Transition and Social Transition Funds. The reports cover the investments, engagement, and actions we have undertaken in pursuit of our objectives over the course of 2023.

In 2023, we witnessed a significant discourse around ESG funds. The term ESG has become heavily politicised, where the purist definition from an investing standpoint has been forgotten – to understand how environmental, social and governance issues might affect a company’s long-term value. This is an essential aspect that should be embedded in all investment analysis. Alongside this, there has been a proactive regulatory push to distinguish between ESG funds and Sustainable funds. While ESG focuses on the integration of environmental, social, and governance issues in portfolio risk management, sustainable strategies seek to deliver real-world sustainable outcomes.

This year marked a significant milestone for our Sustainable Transitions range, with the three equity Funds now disclosing under Article 9 of the EU’s Sustainable Finance Disclosure Regime. The key foundation of this is the requirement that every company held is a “sustainable investment” at the point of investment and throughout its holding. While much of the industry has scaled back from such commitments, Aviva Investors have consistently upheld its belief in supporting the transition to a more sustainable economy. Within the set of companies we invest in across the Sustainable Transition range, we maintain the principle to allocate capital to those 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.

We also continue to engage with not only these companies at the portfolio-level but also policy makers at the firm-level to drive real-world outcomes. Our unwavering commitment seeks to ensure that we are at the forefront of fostering a more sustainable and equitable future.

From a sustainability perspective, challenges persist, however, we remain optimistic about the future. The dedication to achieving the UN’s Sustainable Development Goals remains strong and although they are increasingly underfunded, and policy progress is stalling as political focus shifts, we are determined to ensure that the decade of action does not become one of procrastination. This is why these reports focus on the tangible actions and outcomes at the company level, allowing our clients to see the progress we are making towards our sustainability goals.

2023 Climate Overview

As we reflect on the state of our climate in 2023, it becomes clear that this year has been a pivotal one in the fight against climate change as we acknowledge both the progress made and the immense challenges that lie ahead.

In 2023, the global average surface temperature reached approximately 1.2°C above pre-industrial levels, and greenhouse gas emissions have yet to peak¹. According to the United Nations Environment Programme (UNEP) Emissions Gap Report, current government pledges put the Earth on track for a temperature rise of 2.5°C to 2.9°C by the end of the century². This far exceeds the targets set by the Paris Agreement, which aims to keep warming below 1.5°C. Achieving this ambitious goal requires a drastic reduction in global greenhouse gas emissions—by 42% by 2030.

Moreover, UNEP's latest Adaptation Gap report highlights the financial burden developing countries face in coping with climate impacts. These nations need to allocate between $215 billion and $387 billion annually to address extreme weather, rising sea levels, and other climate-related challenges³.

¹ World Energy Outlook 2023 (iea.blob.core.windows.net)
² EGR2023.pdf (unep.org)
³ Adaptation Gap Report 2023 | UNEP - UN Environment Programme

2023 has been a landmark year for climate policy and international cooperation. The UN Intergovernmental Panel on Climate Change (IPCC) released its Sixth Assessment Report (AR6), which provides critical insights into the current state of climate change. The report emphasizes that climate impacts on people and ecosystems are more severe and widespread than previously anticipated⁴.

Approximately half of the global population faces severe water scarcity for at least one month each year, and higher temperatures are facilitating the spread of diseases like malaria and Lyme disease. To build resilience against these impacts, substantial financial investments in adaptation measures are necessary, particularly in developing countries. The IPCC estimates that $127 billion per year will be needed by 2030, increasing to $295 billion per year by 2050. However, current adaptation funding is only a fraction of these amounts.

Whilst current spending falls significantly short of these needs, 2023 saw a notable milestone with the $100 billion annual pledge to support countries affected by climate impacts being met for the first time.

The transition to a low-carbon economy gained significant momentum in 2023. According to the International Energy Agency (IEA), global investment in clean energy technologies surged by 70%, reaching $200 billion⁵. The electric vehicle (EV) market also experienced significant growth. The IEA's Global EV Outlook report noted a 35% increase in global EV sales in 2023, with EVs expected to contribute to 20% of global care sales in 2024⁶.

In electricity generation, the IEA forecasts a rapid expansion of low-emission power sources. Global power demand is expected to grow at an average rate of 3.4% over the next three years, primarily driven by demand outside advanced economies. The projected growth in power demand is anticipated to be met entirely by additional low-carbon power capacity, including wind, solar, hydro, and nuclear power.

By 2026, these low-emission sources are anticipated to account for almost half of the world's electricity generation, up from 39% in 2023⁷.

⁵ Surging investment in manufacturing of clean energy technologies is supporting economic growth - News - IEA
⁶ The world’s electric car fleet continues to grow strongly, with 2024 sales set to reach 17 million - News - IEA
⁷ Electricity 2024 - Analysis and forecast to 2026 (iea.blob.core.windows.net)

The COP28 conference, held in 2023, marked a significant milestone in global climate negotiations. The conference concluded with an unprecedented agreement to phase out fossil fuels and launched a loss and damage fund to support vulnerable countries. This agreement signifies a pivotal shift towards a fossil fuel-free future and highlights the global commitment to achieving net-zero emissions. The outcomes of COP28 also included targets for increasing renewable energy capacity and enhancing energy efficiency, further driving the transition to a sustainable energy system⁸.

The rise of green subsidy schemes, such as the EU's Net Zero Industry Act and the US Inflation Reduction Act, reflects a growing commitment to supporting clean technologies and reducing emissions⁹. These policies aim to accelerate the manufacturing and deployment of renewable energy and other clean technologies, fostering economic growth and environmental sustainability.

The state of the climate in 2023 underscores the urgency of decisive and sustained action. While there have been significant advancements in clean energy investments and international policy agreements, the path to achieving global climate goals remains challenging. The Climate Transition Equity Fund remains committed to supporting the transition to a low-carbon future, recognizing that substantial financial investments and robust policy frameworks are essential to mitigating climate impacts and building resilience for the future.

⁸ COP 28: What Was Achieved and What Happens Next? | UNFCCC
⁹ IP_23_1665_EN.pdf (europa.eu)

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.

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.

Equities risk

Equities can lose value rapidly, can remain at low prices indefinitely, and generally involve higher risks — especially market risk — than bonds or money market instruments. Bankruptcy or other financial restructuring can cause the issuer's equities to lose most or all of their value.

Counterparty risk

The Fund could lose money if an entity with which it does business becomes unwilling or is unable to meet its obligations to the Fund.

Specialist Fund risk

Certain of the Fund's investments may be more susceptible to foreign government policies, including tax incentives and subsidies, as well as political support for certain environmental initiatives and developments. Under certain market conditions, the Fund may underperform funds that invest in a broader array of shares in global companies, for example, funds that do not provide any screening of companies undertaking fossil fuel activities.