The influential economist Albert Hirschman argued engagement is the most impactful way to drive change. Once you walk away, you lose your voice.
Steve Waygood, chief responsible investment officer at Aviva Investors, shares that view, believing that while divestment may be a simpler solution to ease an investor's conscience, the real question is what is more likely to bring about change?
"Imagine you are an executive at a mining company where lax safety standards are leading to fatalities among staff. You are coming under heavy criticism from the company's investors and could be voted off the board at the next annual general meeting. Would your life become easier or harder if those concerned investors walked away? I would say it becomes considerably easier," he says.
However, the climate crisis demands companies take immediate action. Any climate programme must therefore be timebound with a threat of divestment for weak responders.
Our recently enhanced climate engagement escalation programme includes 30 ‘systemically important carbon emitters' that contribute towards 30 per cent of global scope 3 emissions. The focus is on long-term net-zero targets, clear roadmaps for change, strong governance and reporting to enable accountability for delivery, and the alignment of corporate lobbying with the commitments of the Paris Agreement.
By targeting the largest polluters, in global carbon emissions, positive changes should flow through to wider industry practices and amplify the impact. But for those that fail to meet our climate expectations within a fixed timeframe (both in our equities and credit investments), we will divest.
Divesting at this point would mean clients no longer fund climate laggards. As policy action shapes and changes market fundamentals, portfolios will be rebalanced towards the winners while avoiding companies with stranded assets and climate damaging business models. Market reform and sovereign engagement initiatives can complement this by influencing climate action policy and market fundamentals.
We owe it to ourselves, our clients, and the planet to decarbonise the global economy: it is a fiduciary duty. Helping the oil and gas, metals and mining and utilities sectors correct course is part of that responsibility; simply walking away will not necessarily achieve what those who divest so dearly want it to. This is why, in the face of arguably the greatest market failure in history, investors need to find their voice and up the ante on climate engagement.
Note: ESG and Climate related engagement, goals and exclusions can vary at the investment strategy and portfolio level depending upon country, jurisdiction and individual client needs.
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229651 - 30/09/2022