In this interview Louise Piffaut, Head of ESG Equity Integration at Aviva Investors, shares her views on how the asset manager is engaging with firms to help them become more sustainable and profitable businesses. She also discussed the S in ESG and how human rights aspects are becoming more quantifiable. Louise has a sector specialisation, whereby she provides ESG sector coverage for the Technology and Communications industry globally and conducts corporate engagements on key ESG issues.
Louise, it’s great to have you with us. Could you tell us, from an ESG perspective, what is it you're looking for in potential investments, and how are you helping businesses become more sustainable and profitable?
At Aviva Investors, ESG is fully-integrated part of our investment decision-making process. It’s not like we have an investment view and an ESG view, but rather one view that combines both investment-led and ESG thinking. We take a holistic lens to the investment case to identify the different risks the company faces, and how that company manages those risks. This includes ESG risks and trends. I guess one of the things that we, as responsible investors, try to look for is how companies incentivise themselves, and how they are held accountable for managing those risks, both to stakeholders and within board-management relationships.
What are the benefits of taking such an approach, do you think?
The reason for ESG being ingrained in investment decision-making is that it leads to better client outcomes. ESG factors enrich the investment picture. The second aspect is around fiduciary duty. When we think about client outcomes, yes it's about returns, but it's also about the planet that we all inhabit. It's important to not have financial returns at the cost of other metrics, be it the planet, people, the environment, which might in turn impact financial returns themselves. We take active ownership seriously at Aviva Investors. We believe that investor engagement with companies and having that active dialogue on ESG practices is necessary for companies to embed sustainability in their strategy, and consider their impact on stakeholders.
It's fair to say that most focus to date has been on the ‘E’ – Environment – of ESG and that the ‘S’ – Social – has been harder to measure. Do you think that's changing? And how is the S becoming more quantifiable?
You’re right in that the environment has been the main focus so far, and that’s very understandable. There is a globally agreed target towards net zero and achieving the goals of the Paris Agreement, which makes measurement and monitoring much easier, not only because we can measure scope one, scope two, scope three GHG (greenhouse gas) emissions, but also because we've got an end goal we are all striving towards.
For Social factors, like human rights and individual wellbeing, as the OECD calls it, some of the concepts are harder to define in a consistent way that can be applied globally. This makes them less measurable. And we don’t have an equivalent to the Paris agreement for social issues yet.
But the situation is improving. The UN Guiding Principles have developed a reporting framework for governance, which we at Aviva Investors encourage companies to report on. More importantly, it provides a Human Rights Due Diligence tool that companies can implement to identify the salient points within their value chain and the risks around them. It’s not yet being used enough, but it gives us a good base to work from.
People’s awareness of the S in ESG in general is definitely growing, partly because we have a situation where big corporates, like the big tech companies and social media networks, have a huge impact on our society. People recognise that as a community, we need to better understand this and make sure we can monitor and manage their impact in these areas.
Obviously, tech is a very dynamic sector of the economy in many countries. How is the engagement of the tech sector with ESG priorities developing?
According to MSCI, most ESG funds have more than 20% of their fund allocated to the tech sector. The reason for this is probably because they're asset-light, they don't have a heavy environmental footprint – although that’s debatable - and they claim to do positive things, like bringing people together or increasing digital inclusion.
To put things in perspective, the biggest social media platform had 2.9bn monthly active users in Q4 2021 – more than any country’s population. This means their decision-making impacts more people than that of any government.
People are increasingly aware of the enormous power of the tech companies and the relative lack of control we have over how they wield it. There are many behavioural psychology studies, for example, that show how technology companies can affect how we work and impact us as citizens and, for example how we vote in elections.
It's hard for investors to exert influence because many of these companies have governance structures which means the voting power and general influence other shareholders and investors, including bond holders, have is minimal. Power and control is ultimately with the board and the management, and they often don’t want to be held accountable.
Do you have an example of an escalation process you can share with us?
Yes, we have a climate engagement escalation programme, CEEP, at Aviva Investors. We identified 30 companies which are the largest carbon emitters and we have designed a three-year engagement programme. We have five key criteria we want them to meet. On a six-monthly basis, we look at how these companies are doing against those asks and develop our dialogue based on the progress being made. If progress is too slow, we take the decision to escalate or not. This could mean we vote against the board or vote against management, and ultimately, we could potentially divest.
The reason we developed this programme is because we don’t want to take a simplistic or polarised approach (either engage permanently or immediately divest) to our engagement, and wanted to find a balanced blended approach instead. These companies are in transition. It's about understanding how they are transitioning in response to climate change and addressing the risks in their value chain. Our engagement programme includes robust monitoring and bold escalation, as mentioned just now.
Do you want find out more about ESG in dealmaking? Watch the full Dealmakers Talk digital event on-demand here.
