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Aviva Investors and Environmental, Social and Governance (ESG) Investing

Sustainable and responsible investing is a fast growing segment of the market, and one characterised by continuing debate about the terms and processes that give meaning to ‘sustainable’ and ‘responsible’ investing. To avoid ambiguity, we at Aviva Investors are completely transparent in defining our understanding of the principles of ESG investing, the criteria we use to evaluate these, and the steps we take to engage with the management of the companies we invest in.


Factors influencing sustainable development

  • Consumer Demand: consumers are increasingly demanding ethical products; they are increasingly likely to recycle, to switch to green energy providers and to buy goods from companies that focus on reducing packaging
  • The European Union Emissions Trading Scheme (EU ETS): the implementation of the EU ETS means higher offsetting costs for heavily polluting companies and industries, making them less attractive than their cleaner counterparts
  • Politics: changing political agendas in the US and Europe are increasingly providing a spur to environmental technologies and educational funding
  • Mandatory industry regulation: climate change accords such as the evolving Kyoto Protocol, other climate change agreements and allied carbon reduction commitments are becoming commonplace. Regulation is increasingly affecting other sectors, such as construction, with the intent of improving standards of energy efficiency. Companies breaching regulations on toxic waste such as the Chemical Directive (REACH), Waste Electrical and Electronic Equipment (WEEE) and landfill and pesticide controls, will face increasingly stiff penalties.
  • Best practice: producer responsibility and best practice codes such as the Combined Code on Corporate Governance, the Carbon Disclosure Project (CDP), the UN Principles of Responsible Investment (UN PRI), and the UN Global Compact are rapidly gaining wider adherence. Companies not adopting these are increasingly scrutinised by their peers, customers and the investment community.


Engagement
Ongoing engagement with the companies in which we have holdings is central to the investment process. We endeavour to meet the senior management prior to investing, and on a regular basis throughout the holding period. We use these opportunities to gain more information about the company, its operations and its approach to corporate governance and corporate responsibility issues. We also communicate to them our views on best practice, in addition to any company specific issues that we may have.

We fundamentally believe that companies that combine good governance and corporate responsibility are well positioned for long-term success. As a substantial shareholder, we can influence companies in the direction of more sustainable business practices. A company’s responsiveness to these issues helps us to improve our view of the quality of the company’s management.


Corporate governance and proxy voting
Where corporate governance is concerned, our engagement with the companies we invest in occurs principally through two mechanisms; first, through our face-to-face feedback to management at company meetings: and second, through our voting at company annual general meetings (AGMs).

Face-to-face meetings are an excellent opportunity to validate good practice and question poor performance. We cover issues of sustainability including: employee and supply chain labour standards, health and safety, human rights and environmental management. We maintain detailed records of these meetings to monitor how companies modify their behaviour and follow up on their commitments to us.

In terms of our voting at company AGMs, we expect all top UK and continental European companies to disclose information on their exposure to and management of key environmental, social and corporate governance risks. Where companies publish insufficient information, then we may abstain or vote against the resolution to adopt the Report and Accounts. Aviva Investors (in respect of Aviva Investors Global Services Limited in the UK and Aviva Investors Ireland Limited in Ireland) voted at 265 shareholder meetings in the quarter of 1 January to 31 March 2010. At 151 of these meetings we voted against or abstained on at least one resolution.


Aviva Investors and the Carbon Disclosure Project
We are a founding member of the Carbon Disclosure Project (CDP), which promotes fuller corporate reporting of greenhouse gas emissions. During 2007 we exercised our rights as shareholder to promote this initiative; engaging with 29 companies that were persistently non-compliant with the Project. We target companies on the basis of both the potential impact of climate change on their businesses, and the potential of their business activities to affect the process of climate change. As a result, 15 – or over half – of the companies that we addressed provided a full answer to the CDP questionnaire for the first time. We intend to include this information in our investment analysis going forward, while it will also help to inform us when voting at future AGMs. The CDP has thanked us for our contribution to their improved response rates.

More information on the CDP’s initiatives: www.cdproject.net/