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 will 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.

The case for a Social Transition

In 2022, there was growing recognition and alarm of the problem of rising inequality. In January, Oxfam published its report ‘Inequality Kills’ and in June, The Business Commission to Tackle Inequality – a multistakeholder coalition of more than 60 organisations - urged business to tackle the systemic risk of inequality (Figure 1).

Levels of inequality have promoted renewed criticism of capitalism - often from the most unlikely of places, and increasingly, inequality is playing a key role in igniting social and civil unrest, feeding growing movements for social and political change around the world. It is clear that the benefits of current modes of production are being poorly distributed, are profoundly unsustainable and speak directly to a failing of the prevailing economic model.

The scale of the problem is clear - in 2022, the richest ten per cent of the global population took 52 per cent of global income and 76 per cent of all wealth, while the poorest half of the population earnt 8.5 per cent of global income and owned just two per cent of wealth.Despite economic growth in emerging countries in recent decades, “global inequalities were close to early 20th century levels during the peak of Western imperialism”.⁵

Inequality is also dangerous – it deepens the disadvantages experienced by the most marginalised and least well off. From its role in determining health outcomes during the pandemic, to the worsening of living standards as the cost-of-living deepens, to the disproportionate impacts of climate change and nature loss – those with the least capacity to bounce back are hit hardest.

Tackling inequality requires addressing its root causes. For decades, companies and capital markets have been incentivised to externalise the true costs of production, typically transferring them onto workers, communities, consumers and the environments in which they live. Low wages, exploitative working practices and discriminatory behaviours have become embedded in global value chains, deepening economic and social disparities between, but also, within countries.

Governments have enabled this system to flourish, primarily via a global trade regime that effectively allows global businesses to “offshore harm”. Increasingly, employment models and regressive labour policies “at home” have also come to be based on a lowest-common denominator approach.

Companies – particularly large, multinationals - have enormous influence over the lives of millions of people. Beyond the moral case to act in the wider interests of society, it is in companies’ self-interest to begin the important work of internalising these social costs and help reduce inequality. The business case for tackling inequality is multifaceted and encompasses a need to mitigate a range of risks which include, “limiting productivity and innovation, dampening consumer confidence and spending, destabilizing supply chains, increasing uncertainty in the political and regulatory environment, and deepening disruptions from COVID-19 to climate change”.⁶There are benefits at a company level of adopting fundamental principles, such as respect for human rights and providing decent work.

For instance, guaranteeing human rights such as a living wage, enabling workers to collectively bargain, and protecting customers from the misuse/sale of harmful products can have material benefits for stakeholders and companies such as attracting and retaining talent and customers, building resilient supply chains, and staying ahead of regulatory change.⁸

None of this work will be easy – companies (and their shareholders) wield too much power in the global economy. The inequality crisis will only be addressed if there is a profound rebalancing of interests.

Companies cannot solve the challenge of inequality alone. However, they can and must play an active role in supporting progressive policies such as improvements to employment protections and freedom of association, as well as on corporate tax and lobbying. As Gilbert Houngbo, Director-General of the International Labour Organization (ILO), said: “Inequality is not inevitable; it is the result of political choices.” - we all have a stake in ensuring these choices benefit the many, not the few.

Figure 1:
Key areas for business action to tackle inequality

¹ Oxfam Library
² World Business Council for Sustainable Development
³ Fortune
⁴ The Guardian
⁵ World Inequality Report
⁶ The Business Commission to Tackle Inequality
⁷ European Commission International Partnerships
⁸ EY

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.

Emerging market risk

Emerging market risk Investments can be made in emerging markets. These markets may be volatile and carry higher risk than developed markets.

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.