Macro stewardship
Macro stewardship activities depict firm level stewardship activities, not Fund level.
As long-term investors, we recognise that we do not operate in a vacuum. Feedback loops exist between our investment activities and the real world upon which we rely to deliver long-term, risk-adjusted returns. This means that all our investments have an impact, whether positive or negative, on the environmental, societal, and financial systems upon which the assets we invest in rely.
These real-world systems can affect the overall risk and return profile of capital markets, and therefore financial market participants and, by extension, the best interests of the clients whose capital we are entrusted to manage. We believe it is in our clients’ long-term interests to take effective action to ensure these systems have integrity, are resilient and function sustainably and fairly.
When markets operate in such a way that leads to a sub-optimal outcome for society or the environment or destroys value, they may be said to fail.
Unpriced negative externalities, such as companies not having to reflect the impact their carbon emissions have on climate change in their cashflows and on their balance sheets, fail to reflect their “true” cost or fundamental value and the true extent of the risk. There are a number of different types of market failure, but all undermine the ability of markets to price assets in line with the true nature of their risk and fundamental value. Left unchecked, market failures can increase systemic risks that can disrupt the stability of the market and threaten investment performance and long-term returns. This could ultimately cause the breakdown of the entire system, which would affect all asset classes, in all sectors and geographies.
Each of the Sustainable Development Goals (SDGs) can be said to be representative of one or more market failures. Collectively, the potential failure to deliver the SDGs represents a risk to the stability and integrity of financial markets, with concurrent risks for market participants and our clients. As such, we believe we have a duty to act to highlight and seek correction of market failures and systemic risks as part of our obligations to our clients and to the integrity of markets.
Watch our video interview with Sophie English, Macro Stewardship Analyst at Aviva Investors.
Our macro stewardship work represents a natural progression from our risk management activities and micro stewardship activities. We define the practice of macro stewardship as “taking action to accelerate systemic change with the intention of seeking correction of market failures and mitigation of systemic risks consistent with our view of the long-term best interests of clients and market integrity”. This requires engaging with policymakers, regulators and other key decision-makers who shape the markets within which we operate. Through targeted programmes of engagement that intentionally and proactively identify policies and practices to mitigate systemic risks, we seek to contribute to the stability of the environmental, societal, and financial systems upon which the assets we invest in rely.
Correction of market failures cannot be achieved by market participants alone, as the levers to do so are in the hands of policymakers and regulators. But nor is it something that policymakers and regulators can do effectively or efficiently in the absence of multi-stakeholder engagement. Identifying and establishing regulatory systems and policy interventions to correct material market failures and foster sustainable, fairer, and more resilient capital markets therefore can therefore be enhanced by robust feedback loops between investors and policymakers.
The enactment of policy and regulatory shifts presents threats and opportunities for investors, with winners and losers arising from change. Those who fail to identify and respond to future transitions in the policy and regulatory environment risk missing long-term investment opportunities presented by companies that are well-positioned for the changing environment.
Such a failure in the predictive power of investors is a prime example of a market inefficiency, and often results in the mispricing of capital. As such, macro stewardship, and our work to bring about these corrections, is not only a key mechanism through which we aim to deliver sustainable outcomes, but also better connects us with the likely scale and pace of change. We believe this can provide an information advantage, which in turn enhances our ability to exploit market inefficiencies. As such, our work helps generate positive feedback loops between our investment activities and the environmental, societal, and financial systems upon which our clients depend.
Seeking strong implementation of the Kunming-Montreal Global Biodiversity Framework into national policy frameworks.
The Kunming-Montreal Global Biodiversity Framework (GBF) was agreed in December 2022 at the fifteenth meeting of the Conference of the Parties of the Convention to the Convention on Biological Diversity (CBD COP15) in Canada. The outcome signalled high ambition from the “parties” (countries) to take action to restore and protect nature. It included targets to end the loss of areas of high biodiversity importance and conserve, restore 30 per cent of land and marine areas by 2030 and to align financial flows with the goals and targets of the framework. The policy positions we advocated for during the negotiations – such as the inclusion of all types of finance to be reflected within the goals and targets of the GBF and for large companies and financial institutions to monitor, assess and disclose their risks, dependencies and impacts on biodiversity, including in their operations, supply, and value chains – were reflected in the final version of the framework.
Such commitments presented the opportunity and responsibility to engage with policymakers and regulators throughout 2023 to ensure the implementation of the targets into national policy frameworks, in order to create the enabling environment needed to align finance with the protection and restoration of nature.
We engaged with international and domestic policymakers to strengthen the implementation of the Kunming-Montreal targets and goals, enhance corporate disclosures on biodiversity to improve the accessibility and quality of data available to investors, and thereby help to unlock finance for the achievement of global nature goals. As such, Mark Versey, Aviva Investors CEO, wrote to the finance ministers and central banks of 49 countries to highlight our sustainability priorities in February 2023, including the importance of reversing nature loss to us, alongside transitioning to a low-carbon economy and protecting vulnerable people. Of the three years we have sent the sovereign letters – a practice we don’t see undertaken by our peers – 2023 saw the most responses and all responses committed to our priorities.
Our macro stewardship engagement on the implementation of the GBF during 2023 strengthened the investor voice, in collaboration with other stakeholder groups, on the importance of strong implementation, financing, and delivery of global nature goals in international and national forums.
Looking ahead into 2024, we continued to advocate for high-ambition implementation of the GBF goals and targets, including in the run up to – and at - COP16 in Cali in October 2024, where parties are due to submit updated national biodiversity strategies and action plans (NBSAPs) setting out how they plan to work towards delivering the goals and targets. We sought to build on our support for the delivery of global nature goals through embedding protection and restoration of nature alongside a just climate transition in national and private sector transition plans that implement the goals of both the Kunming-Montreal GBF and the Paris Agreement. We will also continue to seek strong policy development on: (i) Aligning nature and climate policy and transition planning, (ii) the development and scaling of robust markets for nature-based carbon removals, and (iii) Embedding nature into global financial architecture, regulation, and standards.
Ambitious financing targets have been set for nature restoration both internationally - $200 billion per year from public and private sources in the Kunming-Montreal GBF26 – and nationally - £500 million per year of private investment by 2027 and £1 billion per year by 2030 in England.27 While the agreement of the GBF internationally recognised the importance of nature protection and restoration, the development of a bottom-up, national policy framework in the UK has been somewhat slower. As a result, private investment in nature restoration currently remains limited.
Throughout 2023, we sought to strengthen national policy development in the UK, particularly on the role of natural capital, and methods to attract private investment into nature recovery.
We responded to the Environmental Audit Committee’s call for evidence on the current and future role of natural capital in the green economy and on methods to attract private investment in nature recovery. In our response, we emphasised the importance of stopping existing financial flows from harming nature and exploring the role of sector-specific policy to reduce nature-harming finance, as well as the role of public funding and bodies to make natural capital projects easier to invest in, such as through the pooling of projects by the UK Infrastructure Bank. As part of our new work programme on net zero policy delivery, we also developed a range of policy recommendations for the UK Government to unlock investment in nature restoration projects through sustainable agricultural practices and land use, including the introduction of a co-ordinated land use framework and targeted strategies to address the barriers to investment, such as workforce skills gaps, in woodland and peatland projects.
On water quality policy, we provided feedback to DEFRA on its Storm Overflows Discharge Reduction Plan, highlighting areas where it could be further strengthened. We further highlighted that the plan was too narrow in scope through only giving targets for water companies, that its timeline was out of touch with other environmental targets and under the plan, half of storm overflows would still be spilling untreated sewage in 2040 as they were not in scope of the plan. We also flagged these concerns in our submission to the Environmental Audit Committee’s call for evidence on the role of natural capital in the green economy. We also gave evidence in Parliament at the All Party Parliamentary Group (APPG) enquiry on water, sanitation, hygiene, and antimicrobial resistance, drawing on our 2022 white paper, Permacrisis, which highlights how clinically important, antibiotic-resistant bacteria are in our bathing waters at levels high enough for people to be at risk of swallowing them. Additionally, as members of the sustainability focused Aldersgate Group, we supported their work on advocating for ambitious long-term targets within the Environment Act, including with respect to water quality and water availability.
26 Convention on Biological Diversity, “Target 19”, Accessed: May 2024.27 HM Government, “Nature markets: A framework for scaling up private investment in nature recovery and sustainable farming”, GOV.UK, March 2023.
Following our feedback and that of other stakeholders, DEFRA’s response to the submission modified the plan and incorporated one of our key asks - all storm overflows are included within the scope of the plan, including those on coasts and estuaries. The plan frontloads action in particularly important and sensitive areas including designated bathing waters and high priority ecological sites such as Sites of Special Scientific Interest (SSSIs), Special Areas of Conservation (SAC) and chalk streams.
Looking ahead, we will continue to engage with national policy processes to ensure the investor voice on the importance of strengthening nature restoration policies to unlock more private investment is represented. This is essential if the international and national nature finance goals are to be met. Specifically, this included the publication of our report, UK Low Carbon Investment Policy Roadmap, in July 2024 setting out policy recommendations to unlock private investment in nature restoration projects. We sought to engage across the political spectrum to seek the inclusion of the policies in 2024 General Election manifestos, and to support implementation by the new Government.
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