Macro
stewardship

Introduction

As responsible investors, we recognise that we do not operate in a vacuum, and feedback loops exist between investment activity and the real-world upon which we rely to deliver long-term risk-adjusted returns. This means that all our investments impact, positively or negatively, environmental, societal and financial systems.

These real-world systems can affect the overall risk and return profile of capital markets. It is in our long-term interests to take effective action to ensure these systems have integrity, are resilient and function sustainably. When they don’t, and markets operate in such a way that leads to a sub-optimal outcome for society or destroys value, they may be said to fail. Unpriced negative externalities, such as companies not having to reflect the cost of their reliance on finite natural resources, is one example of a market failure.

Left unchecked, market failures can perpetuate systemic risks which can subsequently disrupt the stability of the market and therefore threaten investment performance.

In this sense, each of the SDGs is representative of one or more market failure. 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, including our clients. As such, 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.

Our macro stewardship work represents a natural progression from our integration and micro stewardship activities. We define the practice of macro stewardship as “taking action to accelerate systemic change with the intention of correcting market failures and mitigating systemic sustainability risks”.

This requires engaging with policymakers, regulators and other key decision-makers who shape the rules of the game within which we operate. Through targeted programmes of engagement that intentionally and proactively identify policies and practices to mitigate systemic sustainability risks, we seek to contribute to the stability of the environmental, societal and financial systems upon which the assets we invest in rely.

This is not something that can be undertaken by us alone, or market participants more broadly, who are equipped to exploit market inefficiencies, not rectify market failures. 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 and more resilient capital markets therefore relies upon the existence of robust feedback loops between investors and policymakers.

The enactment of such 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 investment opportunities presented by sustainability leaders that are well-positioned for the changing environment, and thus likely to attract more capital. 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.

See how we use macro
stewardship to seek to
correct market failures:

Activity during 2022

Seeking a target to align financial flows with the protection and restoration of nature in the Convention on Biological Diversity Kunming-Montreal Framework

Parties to the UN Environment Programme Convention on Biological Diversity (CBD) gathered in Montreal in December 2022 for a much-delayed fifteenth conference of the parties to the Convention (or CBD COP15).

As part of our support for a positive and ambitious outcome from COP15, we have been advocating for the CBD framework to include a provision to align financial flows with the protection and restoration of nature, broadly equivalent to Article 2.1.c of the Paris Agreement for climate.

We first supported this concept in our response to a 2019 consultation from Business for Nature, a coalition of business and conservation organisations. In our submission, we voiced our support for alignment of financial flows with the CBD targets. In the intervening period, we worked with colleagues across Aviva to support advocacy for an ambitious COP15 outcome, including collaboration with Business for Nature, Finance for Biodiversity and WWF.

As part of our commitment to the Finance for Biodiversity Pledge, Aviva was one of the three asset owners co-chairing the Public Policy Advocacy Group, the key group representing finance at the negotiations. Amanda Blanc, CEO of Aviva plc, and several Aviva colleagues were closely involved in the pre-COP negotiations of the proposed text and supported the negotiations in Montreal in person. Aviva Investors took part in panels and sessions on Aviva's biodiversity policy, biodiversity measurement and the need for Target 14 and Target 15.

Suresh Weerasinghe of Aviva speaks at the UN’s Biodiversity COP15 preparatory meeting in Nairobi, June 2022
Source: Finance for Biodiversity

The Kunming-Montreal Global Biodiversity Framework was agreed on 18 December 2022. It includes targets to end the loss of areas of high biodiversity importance by 2030, and to conserve and restore 30 per cent of land and marine areas by 2030. We advocated the inclusion of all types of finance, including private activities to be reflected within the goals and targets of the CBD framework 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. This was integrated into the final version of the framework. The hope is that the Kunming-Montreal Framework provides a "Paris moment" for biodiversity, and that through the alignment of financial flows, the power and scale of financial markets can be harnessed to support the protection and restoration of nature, where it has previously contributed to its destruction.

Looking forward, at a UK-level, we will be aiming to build on the systemic reforms that flow from the Dasgupta Review, supporting in the development of, and subsequent advocacy for, measures that positively contribute to the correction of the market failure.

As well as seeking greater UK leadership, we will look to make targeted interventions globally to encourage implementation of the Kunming-Montreal Framework and ensure COP16 is focused on bringing this about. There are also synergies with our work to reform the international financial architecture, ensuring mandates of the institutions which constitute it consider both climate and nature protection and restoration.

Environmental Due Diligence and Directors’ Duties

As investors, and stewards of our clients’ capital, both we and our clients want to understand more fully the impact investments are having on the environment.

However, without a robust due diligence and reporting framework, there is insufficient reporting of this information by the companies we invest in.

To help address this, we supported the progress of the EU’s Corporate Sustainability Due Diligence Directive (CSDDD), responding in May 2022 to the consultation launched by the European Commission. In our response, we supported the creation of the Directive and its recommendations on environmental due diligence. Additionally, we pushed for tougher liability for breaches, including that in cases of the worst or persistent breaches, not only should the company face fines, but directors should face personal liability in the form of disqualification from future office.

This is in recognition of the fact that, at present, directors do not have sufficient personal accountability or incentives to take positive action on sustainability issues. This has been the case, for example, in the UK water sector, where repeated sewage pollution of rivers and seas has occurred without consequence for the directors of water utilities.

Where key sustainability failures occur, fines are ultimately paid by investors and too often seen as the “cost of doing business”. Even when directors are removed, they quickly find alternative roles elsewhere. The CSDDD legislative process continues. We continue to support mandatory environmental due diligence and reporting.

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Watch our video interview with Oliver Morriss, Manager, Sustainable Finance Centre for Excellence at Aviva Investors.

Watch our video interview with
Oliver Morriss, Manager, Sustainable
Finance Centre for Excellence at
Aviva Investors.