Searching for the good way

Steve Waygood says responsible investing has come a long way in just a few years. As a key player in the movement seeking to make the trillions of pounds invested in assets globally influence corporate behaviour to become more sustainable and socially useful, he believes the numbers speak volumes.

The chief responsible investment officer of Aviva Investors, the investment arm of one of the UK’s largest insurers, says around 1,500 financial institutions with $60 trillion of assets under management are claiming to be integrating environmental, social, and governance (ESG) considerations into their investment processes.

Responsible investment, which has its roots in the 1960s, is about engaging with companies in all sectors and persuading them to become more socially useful and sustainable.

Waygood has been a leading light in this movement. He reports that there has been a “paradigm shift” over the past decade in the investment community’s “desire to become a good owner of companies and challenge poor ESG performance”.

Waygood served as an expert adviser to Principles for Responsible Investment (PRI), an initiative that began in 2005 when Kofi Annan, then the secretary-general of the United Nations, invited some of the world’s largest institutional investors to devise globally applicable guidance aimed at aligning their activities more closely with society’s broader objectives. This resulted in the publication of six principles at the New York Stock Exchange a year later.

Waygood believes that the campaign has surpassed most of its founders’ aims, especially those embodied in principle four, which he describes as “the viral marketing principle, where signing up encourages others to do so”. Given that the principles set no absolute performance targets, he says, the development of a set of standards would add legitimacy to the movement, enabling the signatories to show that they aren’t simply paying lip service to it.

“We want financially literate clients to hold all fund managers to account for delivering a credible approach to sustainable investment,” says Waygood, who also lectures on sustainable finance at the University of Cambridge. “The mechanisms we need for this include public benchmarks, developed with input from experts and a range of stakeholders, that would produce league tables. It’s through league tables that you’ll encourage a race to the top.”

Warming to the task

Climate change is an issue that exemplifies how an insurer such as Aviva approaches responsible investment. “I think it’s uncommon to have a CEO in an insurance company who doesn’t recognise that their actuarial assumptions must reflect climate risks, which are now part of the dashboard they need to manage,” Waygood says.

“There are certain products they don’t wish to offer because the climate risks are too great. It’s not quite standard practice yet, but many have realised that it’s through their investment portfolios that they’re compounding such risks. If we take our premiums and invest these in fossil-fuel companies, for instance, we’re exacerbating climate risks, which then come back to harm our business model.”

“Demand is increasing for a climate-savvy approach to investment. That could result in an enormous amount of capital flying into the technology needed to realise the UN’s 2015 Paris Agreement to reduce climate change,” he says, noting that sovereign wealth funds such as those of Norway, Saudi Arabia, and Singapore have been “integrating ESG into their portfolios and the mandates they put out into the market”.

Aviva publishes an annual review of its interactions with companies in which it invests. In 2015, for instance, Aviva had 1,094 engagements with companies in which it invests on ESG issues. This resulted in 238 cases of substantive dialogue, which contributed to more than 600 changes affecting practice in corporate responsibility and governance at companies in which Aviva invests.

“Through engagement we’ve got hundreds of companies to look at their remuneration structure, put more women on boards, pay the living wage, publish greenhouse emissions data, and so on,” Waygood notes. “At [annual general meeting] votes, where we’re approaching 50,000 resolutions each year, we’re highlighting issues ranging from diversity and cyber-security to share buy-backs and the role of the chairman.”

A revolution in sustainability

Despite such achievements, Waygood thinks that a lot more can and should be done to achieve real progress. “While we’ve seen a revolution in sustainability reporting and corporate transparency generally, an expected revolution in accountability, resulting in better performance, hasn’t happened,” he says. “Research houses rank companies privately on their sustainability performance. We need to share some of their methods and results freely with the people whose money is at stake.”

Waygood has been among a number of industry representatives to have approached the governments of Denmark, the Netherlands, Switzerland, and the UK about funding a world benchmarking alliance that intends to start ranking the world’s biggest companies in a league table on how they approach issues such as sustainability.

The alliance plans to start the benchmarking initiative by the end of the year, he explains. “We have an opportunity to democratise big data concerning ESG issues that can be transformative for the companies we invest in, the wider economy, and society as a whole.”

Human rights metrics

Aviva has led the way in formulating an ethical investment strategy, explains Steve Waygood, the company’s chief responsible investment officer.

“Aviva first developed a methodology for ranking human rights in various sectors and then built a coalition of various institutions. We consulted 500 organisations – including investors, NGOs, and think-tanks focused on business and human rights – which gave us 1,500 separate comments.

“Based on this feedback, we updated the methodology and built a document to show how it rates [98 of the largest publicly traded companies in the world] on their performance.

“You can look at the scores of Marks and Spencer, McDonald’s, and Macy’s, say, and see why we gave them those scores. Companies can determine why they did well, or badly, through understanding how they apply governance or enact policy. This shows them how much they could have done and, therefore, where there are opportunities for improvement.”

The Corporate Human Rights Benchmark can be found at corporatebenchmark.org.

Principles for responsible investment

All signatories have pledged to:

• Incorporate ESG issues into their investment analysis and decision-making processes.
• Be active owners and incorporate ESG issues into their ownership policies and practices.
• Seek appropriate disclosure on ESG issues by the entities in which they invest.
• Promote acceptance and implementation of the principles within the investment industry.
• Work together to enhance their effectiveness in implementing the principles.
• Report on their activities and progress towards implementing the principles.