Macro stewardship crucial in addressing market failures

Oksana Patron

8 November 2022

Macro stewardship can help push for positive systems change and sustainable market reforms at the time when the incentives for asset managers and financial institutions to actively call for such a change are too weak, Aviva Investors said.

This meant that stewardship in its fiduciary sense would need to be re-defined and re-written in response to the sustainability concerns and it could be no longer limited to engagement with individual companies.

Aviva Investors’ chief executive, Mark Versey, said that stakeholder capitalism and environmental, social, governance (ESG) investing should be mutually inclusive and reinforcing and, for that to work, it was crucial to incorporate macro stewardship into everyday ESG activity.

However, part of the problem was the definition as there were different types of sustainable investing and what they meant for stakeholders as well as vast differences between integration, screening and engagement.

On top of that,  the extent to which a product provider was advocating for a more sustainable system should also be one of the factors consumers considered when choosing someone to manage their money.

“Despite all this great work and momentum, I still worry the vast sums of ESG-related money will fall short of their intended goal,” Versey said.

“We need to redeploy existing capital at scale, and the faster we stop financing the bad stuff, the easier it will be. We don’t need more sustainable finance as though it was a separate category of money; all of finance needs to become sustainable.”

Versey said that the financial system needed green finance “as much of it as possible”, to help with the transition to net zero and other sustainability targets, but even effective corporate stewardship on its own would not come close to being enough.

According to him, thematic investing and corporate engagement represented micro nudges when what was actually needed was macro-level, systemic change.

“To put it another way, it is like taking a pea shooter to a gun fight. We need to be far more ambitious and innovate the system itself, including the supporting multilateral architecture that sits around it.”

According to Aviva Investors, with new standards of stewardship emerging, the asset managers could be no longer judged on their ESG promises but they would also need to take action to correct market failures.

Following this, Aviva’s CEO said consultants and fund selectors had a pre-existing model for incorporating firm-level assessments and these should be expanded and updated to include macro stewardship ratings.

“As well as systems thinking and a holistic mindset, it requires close alignment between micro and macro engagement. Engaging with companies, sovereigns, state-owned enterprises, policymakers and other influential changemakers in a considered and coordinated way will ensure maximum impact from minimal resource deployment,” he said.

“People, time and money are always constrained. Alignment for us comes in the form of three pillars – people, climate and Earth – that link closely to the UN Sustainable Development Goals.”

“I have seen many phases in responsible investing. This era, where targeted corporate engagement and macro stewardship initiatives combine with the reallocation of capital towards more sustainable investments, is by far the most exciting. Never has so much interest and, more importantly, capital flowed towards the sector. But if we are to properly harness it to avert environmental and societal disasters, tinkering around the edges will not be enough. We need to start actively changing the system itself.”