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Oliver Balch interviews the head of responsible investment at the UK insurance giant to find out why he is one of Christiana Figueres’ leading climate optimists and prime mover for sustainable finance
In a few months’ time Steve Waygood will deliver the prestigious annual Roland Clift lecture at the University of Surrey’s Centre for Environmental Strategy. The Centre’s alumnus is still pondering over what to say exactly, but he is in no doubt about the main theme.
A clue may come from what he is wearing the day we speak by Skype from his north London home: a T-shirt with the words Stubborn Climate Optimist, the rallying cry of Christiana Figueres’ Mission 2020 campaign to bend the curve on CO2 emissions before the end of the decade.
For the best part of two decades, 44-year-old Waygood has devoted himself to addressing two related questions: why is the global finance system so predisposed to ignore climate change and other sustainability issues, and what can be done about it?
I want to get capital flowing in the right direction so that it actually rewards companies that are more sustainable
His search for answers has led him on an intriguing journey. From temporary receptionist at environmental charity WWF (he ended up initiating its ethical finance programme), he went on to work as a responsible investment analyst for asset management firm F&C, while finishing a PhD he had started at WWF on the campaigning tactics of pressure groups (later the subject of a book, “Capital Market Campaigning: the impact of NGOs on companies, shareholder value and reputational risk”).
For the last 12 years, this single-minded pursuit has landed him at Aviva Investors, the investment arm of UK insurance giant Aviva. As chief responsible investment officer, he runs a team of 16 experts seeking to ensure that the firm’s £352bn asset portfolio is managed as sustainably and ethically as possible.
“I want to get capital flowing in the right direction so that it actually rewards companies that are more sustainable, which is how the market economy should be working,” Waygood says.
But this is the real, grubby world of hard-nose finance we’re talking about. Investors care about pounds and pence, profit and returns. So can such hopes be anything more than fanciful thinking?
First, consider where he is sitting. Aviva Investors is one of the City of London’s bona fide grandees. Waygood’s talk of sustainable capitalism isn’t just bar-room chatter. In recent years, Aviva has signalled its intention to divest from tobacco or fossil fuel firms. When it acts, the markets listen.
And if you think this is just another finance giant trotting out the usual sustainability spiel, then think again. With its roots dating back to 1696, Aviva likes to talk up its illustrious past. But with global temperatures creeping up gradually and weather getting ever more freaky, it is the firm’s future that is front of mind at present.
We’re seeing heads of state around the world now talk about sustainability in the market
“As an insurer, we underwrite the worst forms of climate change. Our shareholders will be exposed to it, not tomorrow, not next year, but in a few decades from now,” Waygood notes.
Second, consider the attention now given to sustainable finance. When Waygood started out, the theme was about as popular with bankers as tree-hugging is with logging companies. Now, the phrase is on the lips of central bankers, senior politicians and, yes, even the chief executives of Bank of America and their ilk.
“We’re seeing heads of state around the world now talk about sustainability in the market, so within the political sphere it is now a mainstream issue,” says Waygood.
The legacy of the 2008 global financial crash, combined with growing geopolitical instability, the threat of a global trade war and massive natural resource depletion, have prompted a stocktake about where contemporary market capitalism is taking us.
“There is definitely a change of awareness amongst individuals who are in positions of power and influence,” Waygood argues. Some of them, he says, are beginning to see that “the structure of this economy is actually unsustainable and that something needs to be done about it”.
Waygood was the author of a seminal 60-page paper advising international policy makers on how to reform capital markets that Mark Wilson, CEO of Aviva Group, introduced at a United Nations event in New York in 2014.
Very few people understand finance, but the logic of the roadmap is unassailable
Aviva’s “Roadmap to Sustainable Capital Markets” made three major recommendations: the provision of sustainability-oriented investment instruments; changes to the cost of capital to reflect companies’ sustainability performance; and moves to get equity investors exercising their ownership rights in the cause of increased corporate sustainability.
“We were the first large financial institution that I know of to come out with an agenda for change that wasn't simply the corporate microeconomic level, but was at a macroeconomic level. And not just at the level of one economy, but it was a global agenda for change,” says Waygood.
The paper, which was heavily influenced by the conclusions from his doctoral thesis, kept him run off his feet in the months after its publication.
If he wasn’t talking to industry colleagues in Geneva or Wall Street, he was chewing the ear of industry leaders at Davos or patiently going through the main recommendations with policy makers in Brussels and Washington.
“Very few people understand finance, but the logic of the roadmap is unassailable ... So by shining a light on how the system works and helping people to understand it, the roadmap connects with people. That's one way I think it resonates, possibly the most important way,” he notes.
Several of the report’s proposals found their way into the 2015 Addis Ababa Action Agenda, the guiding document for the financing of the UN’s Sustainable Development Goals. The goals themselves also include traces of the roadmap’s suggestions, notably in their call for corporations to integrate sustainability information into their reporting cycle (Goal 12.6).
The vast majority of investors are investing in a way their clients are not ethically comfortable with
But the roadmap’s warmest reception has been within the European Commission. In 2016, the Commission established a high-level expert group with an explicit mandate to accelerate the transition towards a more sustainable finance system. The group’s interim report in 2017 and its subsequent Action Plan for financing sustainable growth both endorse core recommendations from Waygood’s report.
Speaking at the launch of the plan, the European Commissioner for financial matters Valdis Dombrovskis stressed the importance of “investments go[ing] in the right direction” and of “harnessing the vast power of capital markets in the fight against climate change” – words that could have come from Waygood’s own mouth.
The EU plan suggests the creation of a common language to describe sustainable finance; the setting up of an EU label for green financial products; and the inclusion of sustainability issue in corporate reporting (as per the recommendations of the Financial Stability Board's Task Force on Climate-related Financial Disclosures).
But the measure that particularly excites Waygood is the proposed duty of asset managers and institutional investors to take sustainability into account in the investment process. Following on its heels is the call for insurance firms to advise clients on the basis of their sustainability preferences.
Incredibly, individuals are rarely if ever asked about their ethical preferences by those managing their investments. As Waygood pointed out in a recent TedX talk, only a psychopath would be happy to benefit financially from the death of a friend or family member. Yet pension holders or stockholders blithely allow their money to prop up arms manufacturers and tobacco companies.
“No one is asked in their investment advice as a matter of routine ... So it’s assumed that unless people voice concern then they’re happy. As a consequence, the vast majority of investors are investing in a way that they [their clients] are not ethically comfortable with,” he says.
The incentives in the financial supply chain couldn't be more short-term and more out of kilter with sustainability
Another key component is greater transparency. Waygood would like to see far more information about how investors are managing their material environmental, social and governance risks. He would also like to see the powers of financial regulators beefed up so they can jump on those who decline to disclose.
Aviva has been prime mover behind the creation of a World Benchmarking Alliance, whose mission would to provide investors and the public with access to free and publicly available corporate sustainability benchmarks that rank companies on their sustainability performance and contribution to achieving the SDGs.
It has been working with the the Business and Sustainable Development Commission and the Dutch-based Index Initiative on a year-long stakeholder consultation on the WBA, and its report will be presented at a high-level event in New York on 24 September during Climate Week.
An important new report called Financing our Future will also be launched at Climate Week New York. Waygood’s team helped write the draft report, and the final report will include the input of a veritable Who’s Who of CEOs and CFOs from 60 companies across the global investment chain – asset owners and managers, investment consultants, banks, credit rating agencies, stock exchanges, companies and regulators – who attended an all-day workshop at St James’s Palace convened by the Prince of Wales and Accounting for Sustainability (A4S) in July.
As the Prince of Wales told his assembled guests: “I hope that – with all of your intellectual firepower and influence – you might be able to identify solutions to overcome those barriers that are so frequently highlighted as a reason for inaction.”
Concerted action across the investment chain is needed because, as Waygood admits, despite promising noises from the EU and a host of green finance’ initiatives from leading economies, capitalism is still failing.
“The incentives for individuals and businesses in the financial supply chain couldn't be more short-term and they couldn't be more out of kilter with sustainability,” he says.
As a self-confessed “intrapreneur”, however, Waygood prefers to dwell on possibilities for progress rather than barriers to change. No doubt he will fill his upcoming lecture will erudite insights from the frontline of finance. But hopefully listeners will also take away a smidgen of his disruptive intent. The investment world needs more stubborn optimists.
CV: Steve Waygood
Lives: North London
Chief responsible investment officer, Aviva Investors
Associate director, Insight Investment
2002 – 2006
Senior analyst, Friends Ivory & Sime (now F&C)
Head of Environmental Management, and Ethical investment and Environmental Management Administrator, WWF-UK
1996 – 2001