A major U.K. institutional investor has dismissed a commonly-held fear of ESG investing — that it hampers financial returns.
Aviva UK Life, part of Aviva Plc, sees environmental, social and governance considerations as a central pillar of its risk and return analysis, the division’s chief investment officer said in an interview.
Some investors worry excluding securities issued by profitable companies in industries such as tobacco, gambling, alcohol, oil and gas may erode returns. More than half of investors think they must sacrifice financial performance to invest responsibly, according to a recent survey by NN Investment Partners.
But proponents of the approach argue they can deliver more robust returns because ESG analysis can give them a competitive edge, rather than serving solely as a means of blacklisting assets.
“We’re past concerns that we’re compromising on returns by factoring in ESG,” said Ashish Dafria, Chief Investment Officer at Aviva UK Life. “It’s the right way to manage money going forward.”
The division’s approach is part of a wider evolution in which fund managers are using ESG-related data-sets to better identify risks in their portfolios. Investors now see improving performance as the primary reason for including ESG in their strategies, according to research by RBC Global Asset Management.
Technology is helping improve environmental and social analysis, said Dafria, which have both become a bigger focus for Aviva in the past two years. Examples include assessing flooding dangers across companies’ entire supply chains by using big-data analysis tools, which can also help interpret the potential damage of corporate scandals, he said.
Aviva UK Life has started using ESG to shape asset allocation, even if “it is not yet systematic or quantitative enough” compared to other risk-return metrics, Dafria said. In the future it may allocate a fixed portion of its portfolio to assets that will help meet objectives set out in the Paris Agreement on limiting global temperature increases.
It’s also considering how to offset the ESG risk inherent in one asset by effectively hedging it with another. For instance, it may seek renewable-energy exposure to offset investments in oil producers amid a shift away from fossil fuels.
“We want to get to that point — I think we have to, both from a risk management perspective and in view of the questions our investors are going to ask,” said Dafria. “ESG is front and center of nearly everyone’s mind.”
Photograph: A pedestrian passes the headquarters of Aviva Plc in London, U.K., on Friday, March 7, 2014. Photo credit: Matthew Lloyd/Bloomberg.
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